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One thing nobody has mentioned yet - make sure you're considering state tax implications too. Some states don't follow federal treatment of S-Corp sales. In California for example, they can treat these sales differently and sometimes less favorably than federal. Double check your state's rules!
This is so true. I sold my business in New Jersey and was hit with state taxes I wasn't expecting because their treatment differs from federal. Definitely check with a local tax pro who knows your state's quirks.
Great thread with lots of helpful info! Just wanted to add one more consideration for the OP - make sure you account for any depreciation recapture on business assets if you go the asset sale route. Even though you mentioned minimal physical assets, if you've claimed depreciation on computers, software, or equipment over the years, that depreciation gets "recaptured" and taxed as ordinary income (up to 25% rate) rather than capital gains rates. This is reported on Form 4797 and can be a surprise tax hit that many people don't expect. It's one more factor to weigh when deciding between asset vs stock sale structure. Your accountant should be able to pull your depreciation schedules to calculate the potential recapture amount so you can factor it into your decision.
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Has anyone had this issue with the self-employed 401k too? I'm considering switching from a SIMPLE IRA to a solo 401k next year and wondering if this same reporting weirdness happens there as well. My CPA is on vacation and I need to make a decision on this soon.
I switched from SIMPLE to Solo 401k two years ago, and there's actually a difference in how they're reported! With Solo 401ks, you don't receive a Form 5498 at all. Instead, once your plan exceeds $250k in assets, you'll need to file Form 5500-EZ annually. For contributions, your plan administrator (usually the brokerage) will still track when you made them and which tax year you designated them for, but there isn't the same form mismatch issue. You'll just report your contributions directly on your tax return. In my experience, it's actually simpler from a paperwork perspective.
This is such a relief to read! I'm dealing with the exact same situation right now - made a SIMPLE IRA contribution in February 2023 for tax year 2022 and was panicking when my accountant told me the Form 5498 wouldn't match my tax return. What's really helpful is seeing that multiple people have confirmed this directly with the IRS. I was worried I'd made some kind of mistake with the designation when I made the contribution, but it sounds like this timing mismatch is completely normal and expected. One thing I'm curious about - for those of you who have been through this before, have you ever actually been questioned about it during a tax review or audit? I know everyone says it's not a problem, but I'd love to hear from someone who's actually had their return examined with this situation.
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Hey Connor! I just went through this exact process about 3 weeks ago as a recent grad, so I totally get the stress you're feeling. Here's what helped me navigate it smoothly: **The verification is super common for people like us** - the IRS algorithm flags returns with education credits, multiple income sources (like TA work, research stipends, etc.), or major changes from previous years. It's fraud protection, not an audit. **My step-by-step experience:** - Online notification showed up first when I tried accessing my tax transcript - Physical Letter 5071C arrived 9 days later (but don't wait for it!) - Completed entire ID.me verification online in about 35 minutes using my laptop - Got confirmation email immediately from ID.me - Refund deposited exactly 17 days after completing verification **What made it go smoothly:** - Used desktop computer - mobile interface kept crashing on me - Had documents ready: driver's license, Social Security card, recent bank statement - Did the selfie verification near a window with natural light (took 3 tries but worked) - Took screenshots of every confirmation page for my records **For the address issue since you just finished your master's:** I had moved recently too and used my current lease agreement + bank statement to supplement my driver's license which still had my old address. ID.me handled it without problems. The whole process feels invasive but it's legitimate, and honestly once you're through it, there's a sense of relief. Since you mentioned your tax situation got more complex, this verification actually helps ensure your return processes without future issues. You've got this! Just budget about 45 minutes and make sure you have good internet and lighting. Happy to answer any specific questions about the process!
@Oscar O'Neil This is such a comprehensive breakdown - thank you! I'm actually going through this verification process right now and your timeline is really encouraging. The 17-day refund timeline gives me something concrete to expect rather than just worrying indefinitely. I have a couple questions about your experience: When you mentioned using your lease agreement to supplement the address verification, did you have to upload it as a separate document, or was there a specific section in the ID.me process for explaining address discrepancies? Also, you said the selfie took 3 tries - were you able to retry immediately, or did you have to wait between attempts? I'm trying to plan the best time to sit down and do this when I won't be interrupted. It's really reassuring to hear that this is standard for recent grads with complex returns rather than some kind of red flag. The fact that you, Emma, and several others all had similar experiences with education credits and multiple income sources makes me feel much less anxious about the whole thing. Thanks for offering to answer specific questions - this community has been incredibly helpful for navigating something that initially seemed really intimidating!
Hey Connor! I just completed the ID.me verification process last week and wanted to share my experience since I was in almost the exact same situation - recent grad with education credits and multiple income sources from research assistantships. **Quick reassurance first:** This is incredibly common for people in our situation. The IRS flags returns with education credits, multiple income sources, or significant changes from previous years as a routine fraud prevention measure. You're not being audited or in trouble! **My timeline:** - Online notification appeared when I tried to access my tax transcript - Physical letter (5071C) arrived 12 days later - Completed verification online in 42 minutes using laptop - Refund processed 15 days after verification completion **Key things that helped:** - Started immediately when I saw the online notification (don't wait for the physical letter) - Used my laptop instead of phone - mobile interface is really unreliable - Had all documents ready: driver's license, Social Security card, recent utility bill - Did the selfie verification during daytime near a window - lighting is crucial - Took screenshots of every confirmation page **For your complex tax situation:** Since you mentioned this is your first time with a more complex return, keep all verification documentation. The IRS tends to be more cautious with returns that show significant changes from previous years, which is super common for new graduates. The facial recognition part took me 4 attempts (remove glasses if you wear them), but once that was done, everything processed smoothly. The whole thing feels intimidating at first but it's actually pretty straightforward once you start. Let me know if you have any specific questions about the process - happy to help a fellow recent grad navigate this!
@Amina Diop Thanks so much for sharing your experience! It s'really reassuring to hear from another recent grad who went through this exact situation. Your 15-day refund timeline is actually one of the fastest I ve'seen mentioned in this thread, which gives me hope! I m'curious about the facial recognition part you mentioned - when you had to do 4 attempts, did you get any specific error messages or feedback about what was going wrong, or did it just keep saying try "again ?"I wear contacts instead of glasses, so I m'wondering if that might cause similar issues. Also, you mentioned keeping all verification documentation for future reference - did ID.me or the IRS give you any indication about whether completing this verification makes you less likely to get flagged in future years, or is it pretty much a fresh evaluation each time you file? I really appreciate everyone in this thread sharing their experiences - it s'made something that seemed really scary feel much more manageable knowing it s'a standard process for people in our situation with education credits and research income. The community support here has been amazing!
@Amina Diop This is incredibly helpful - thank you for sharing such a detailed timeline! I m'actually in the exact same boat as Connor and you - just finished my degree and dealing with this verification for the first time. Your 15-day refund processing time is really encouraging compared to some of the longer delays others have mentioned. I have a question about the documentation - you mentioned having a utility bill ready for address verification. Since I just moved from my college apartment to a new place for work, would a lease agreement work instead of a utility bill? Some of my utilities are still getting set up at the new address. Also, when you did the facial recognition attempts, were you able to do all 4 tries in the same session, or did you have to come back later? I want to make sure I block out enough time to complete everything in one sitting. Really appreciate you mentioning that this is routine for people with education credits and research income - it makes the whole process feel much less intimidating knowing it s'standard rather than some kind of red flag!
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Has anyone used the IRS Voluntary Classification Settlement Program? I think I might have incorrectly classified some workers and want to fix it before I get audited.
I used it last year. It lets you reclassify contractors as employees with reduced penalties. You'll pay 10% of the employment tax liability that would have been due on compensation for the most recent year, but no interest or penalties. You also won't be audited on these workers for prior years.
I was in a similar situation when I started my consulting business. The key thing to remember is that Forms 940 and 941 are only required when you have actual employees (W-2 workers) who receive wages subject to federal income tax withholding, Social Security, and Medicare taxes. Since you're only working with independent contractors and issuing 1099-NECs, you generally don't need to file these forms. However, I'd strongly recommend keeping detailed records of your contractor relationships to support their independent status - things like signed contracts specifying they're contractors, proof they work for other clients, documentation that they provide their own tools/equipment, and evidence they control how and when the work gets done. One thing that helped me was creating a simple checklist based on the IRS's three main factors (behavioral control, financial control, and relationship type) to evaluate each contractor relationship annually. This way I can catch any situations that might be drifting toward an employment relationship before they become a problem.
Sean Fitzgerald
8 Something important to mention about backdoor Roth IRAs that hasn't been covered yet - if you have ANY other traditional IRA funds (including SEP or SIMPLE IRAs), you'll get hit with the pro-rata rule when you convert. This tripped me up badly last year using FreeTaxUSA. For example, if you contribute $6,000 non-deductible to a traditional IRA but already have $24,000 in deductible traditional IRA money elsewhere, only 20% of your conversion would be tax-free. FreeTaxUSA handles this calculation on Form 8606, but you need to make sure you enter ALL your IRA balances correctly.
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Sean Fitzgerald
•3 Wait, seriously? I have an old Traditional IRA with about $30k in it from a 401k rollover years ago. I just did a $6k contribution to a new Traditional IRA and converted it thinking it would be tax-free. Am I going to owe taxes on most of that conversion? Is there any way to fix this after the fact?
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Sean Fitzgerald
•8 Unfortunately, yes, you'll likely owe taxes on most of the conversion because of the pro-rata rule. With $30k in existing traditional IRA funds and a new $6k non-deductible contribution, only about 16.7% ($6k/$36k) of any conversion would be tax-free. There's not much you can do to fix it after the conversion has happened, but for future reference, some people with existing traditional IRA balances first roll those into a current employer's 401k (if the plan allows it) to clear the decks before doing backdoor Roth conversions. That way you avoid the pro-rata calculation entirely. But that would have needed to be done before the conversion.
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Sean Fitzgerald
5 Has anyone else had issues with FreeTaxUSA calculating taxes wrong on their backdoor Roth? I entered my non-deductible contribution in the IRA section and my conversion in the income section, but it's still showing that I owe taxes on the full conversion amount even though it should be tax-free (I have no other IRAs).
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Sean Fitzgerald
•16 I had the same issue! You need to make sure you're properly filling out Form 8606. In FreeTaxUSA, after entering your non-deductible contribution and the conversion, go to "Other Tax Forms" and select Form 8606. Make sure line 2 shows your non-deductible contribution amount, which establishes your basis. The software should then calculate correctly that you don't owe taxes on the conversion.
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Gianni Serpent
•Also make sure you check the "NonDeductible IRA Contributions" checkbox when entering your traditional IRA contribution. I missed that initially and FreeTaxUSA was treating my contribution as deductible, which threw off the entire Form 8606 calculation. Once I went back and checked that box, the software properly recognized it as a non-deductible contribution and the tax on my conversion went to zero.
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