What kind of resources did you need to dedicate to get this off the ground? We've thought about it but worried about the compliance risks given how the IRS is scrutinizing these claims.

We started with one full-time CPA who spent about 8 weeks becoming our in-house expert (lots of CPE, IRS notice reading, and conference attendance). Then added a dedicated admin person for documentation collection and organization. The compliance risk is manageable if you're conservative and thorough with documentation. We built a 27-point checklist that every claim must satisfy before filing. It took about $30K in startup costs (mostly training and building templates/processes), but we've generated over $400K in fees since starting 14 months ago.

This is so important. We had a similar disaster with an ERC firm that disappeared when the audits started coming in. What red flags should people watch for when vetting these firms?

That's a great point! He definitely had some expenses - mostly software subscriptions and a new laptop he had to buy specifically for this job. I wasn't sure if we could deduct the full cost of the laptop or if we needed to depreciate it.

For the laptop, it depends on when he purchased it and how much it cost. If it was under $2,500, you can potentially use Section 179 to deduct the full cost in one year, assuming it was used more than 50% for business. For the software subscriptions, those are generally fully deductible as business expenses in the year paid. Just make sure you keep receipts for everything. You might also want to look into home office deduction if he was working from home - you can either use the simplified method ($5 per square foot up to 300 square feet) or the regular method which calculates the actual expenses.

Is there any way to reduce the self-employment tax hit? That 15.3% is brutal when you're already paying regular income tax too.

The divorce was finalized in 2019, but the agreement definitely doesn't call it alimony. It's labeled as "property settlement" in the divorce decree. Is that clear enough for the IRS or does she need additional documentation? And would the extra amount he paid her ($2,500 over the agreed amount) fall under the same category?

If the agreement specifically labels it as "property settlement" in the divorce decree, that's very clear documentation for the IRS. That's exactly what you want - language that explicitly categorizes the payment as division of marital assets rather than support payments. For the extra $2,500, that's a bit trickier. Since it wasn't specified in the original agreement, the IRS might consider it as a separate transaction. If her ex specifically characterized it as interest or compensation for the delay, it could be considered taxable income. If it was presented as an additional property settlement or a gift, it would likely not be taxable to her. I'd recommend documenting any communication about that extra amount (emails, texts) that explains the nature of that additional payment.

This is a really good point. When I went through my divorce, my ex-spouse incorrectly issued me a 1099 for a property settlement payment. I had to file Form 8275 (Disclosure Statement) with my tax return to explain why I wasn't reporting the amount as income. Saved me from an automatic audit flag when the IRS computers saw the 1099 but didn't see matching income on my return.

She hasn't received any tax forms yet, but that's a really good point! I'll tell her to wait before filing her taxes to make sure she doesn't get a 1099 from him. If she does, we'll definitely need to file that Form 8275 with an explanation. The divorce was such a mess that I wouldn't be surprised if he reports it incorrectly just to cause problems.

Thanks for this! Did you have to specifically ask your attorney to break it down this way? My lawyer seems focused only on getting the highest dollar amount and doesn't seem to understand or care about the tax implications.

Yes, I had to specifically ask - actually, I had to insist on it. Most attorneys are focused solely on the gross settlement amount rather than your net after taxes. I ended up printing out IRS Publication 4345 "Settlements — Taxability" and bringing it to my attorney to show him exactly what I needed. Even if your attorney isn't knowledgeable about tax implications, you can request that the settlement agreement specifically allocate amounts to different categories. For example, you want as much as possible categorized as "compensation for diminution in property value due to undisclosed defects" rather than "damages for fraud." The former is more likely to be treated as a reduction to basis while the latter might be considered ordinary income. Don't be afraid to push back - this is your money and your tax situation!

You're right that the Tax Cuts and Jobs Act severely limited casualty loss deductions for tax years 2018-2025. For non-business casualties, they're only deductible if they result from a federally declared disaster. This is why structuring the settlement properly is so important. What you can't claim as a casualty loss might still be handled favorably if properly categorized as a recovery of capital or reduction in basis. However, fraud victims specifically have had a tough time under current tax law since the casualty loss limitations went into effect.

Does having a separate bank account matter for proving it's a business? I just use my personal checking for everything.

Having a separate bank account isn't required but it's extremely helpful for proving business intent. It shows you're treating the activity professionally and makes tracking income and expenses much easier. It's one of the factors the IRS considers when determining if something is a business vs. hobby. Other factors include business cards, a business name, proper recordkeeping, and marketing efforts. The more business-like behaviors you demonstrate, the stronger your case for self-employment treatment.

Wait I've never done quarterly payments! I've been self-employed for 2 years and always just paid at tax time. How much trouble am I in?