Forgot to report home sale on 2022 tax return - does IRS notice mean trouble?

So does that mean they'll have to file an amended return using Form 1040X? And if they're married filing jointly with a gain just over $250k but under $500k, they're completely in the clear with no taxes owed? I'm in a similar situation but sold my house with a smaller gain.

You actually don't need to file a complete 1040X amended return in this situation. The IRS notice is offering a simplified process - just complete the missing Schedule D and Form 8949 showing the exclusion, and send those with your response to the address on the notice. For married couples filing jointly, the exclusion is $500,000, so with a $255,000 gain, they would be completely in the clear assuming they meet all requirements (owned and used the home as primary residence for at least 2 of the 5 years before sale, haven't excluded gain from another home sale in the past 2 years).

Does it actually work with IRS CP letters? I got something similar about missing 1099 income and I'm trying to figure out if I should just hire an accountant or try to handle it myself. Does the system tell you exactly what forms you need?

I'm wondering if this works for more complicated situations? I sold a rental property AND my primary residence in the same year and I'm getting letters from the IRS about both. Do they help with figuring out depreciation recapture on rentals too?

It absolutely works with CP notices - that's what I had (CP2000). It identified the exact issues and walked me through exactly which forms I needed to complete. Saved me from paying an accountant $350 for something relatively straightforward. For rental properties and depreciation recapture, yes it handles those too. It distinguishes between primary residence exclusions and investment properties, and it calculates depreciation recapture amounts. I know because my brother used it for his rental property sale and it guided him through Form 4797 and the depreciation recapture calculations.

How does this actually work? I've tried calling the IRS dozens of times and either get a busy signal or wait on hold for hours only to get disconnected. What's the process like?

Sorry but this sounds like BS. There's no way to "skip the line" with the IRS. They're understaffed and everyone has to wait. I've been trying for weeks to get through. How would some random service get you to the front of the queue when the IRS explicitly says wait times are 30+ minutes?

The service basically automates the calling process. It uses technology to continually dial the IRS until it gets through, then it calls you when it has an agent on the line. It's not skipping any lines - it's just handling the frustrating part of constantly redialing when you get busy signals or disconnects. They use the public IRS phone lines just like everyone else, but their system can keep trying much more efficiently than a human manually redialing. Once you're connected, you're talking directly to an IRS agent just like if you'd called yourself. It saved me days of frustration, especially during tax season when the lines are constantly jammed.

Did you use an accountant or did you just fill out the forms yourself? I'm worried about making another mistake and making things worse. Also, should I be concerned that they might decide to audit me now that I've had this issue?

I filled out the forms myself - Schedule D isn't too complicated for a primary residence sale. Just make sure to enter the dates correctly and check the box that indicates the gain is excluded. TurboTax or other tax software can help with this if you have it. As for audits, this type of notice is actually pretty routine and doesn't increase your audit risk if you respond properly. The IRS gets information about property sales from third parties, and they're just matching that information to what was on your return. Once you provide the missing information and it shows no tax is due, the matter is typically closed without further action.

Yes! Definitely include home improvements in your cost basis! This reduces your taxable gain. Your basis includes purchase price PLUS improvements PLUS closing costs when you bought. From what you're saying though, even without the improvements, you'd still be under the $500k exclusion if married filing jointly, but it's still good to document everything correctly.

This is really reassuring to hear from someone with experience! I'm in almost the same boat - got an IRS notice about not reporting a home sale and I've been stressed about it for weeks. Quick question though - when you mention including improvement costs, do things like regular maintenance and repairs count, or does it have to be actual capital improvements? We painted the whole house and replaced the HVAC system before selling, but I'm not sure what qualifies.

Great question about what counts as improvements versus maintenance! The key distinction is that capital improvements add value to your home, extend its useful life, or adapt it for new uses - these can be added to your cost basis. Regular maintenance and repairs just keep your home in good condition and generally don't count. From what you mentioned: replacing the HVAC system would definitely count as a capital improvement since it's a major system replacement that adds value and extends the home's life. Painting is trickier - if it was just regular maintenance painting, it typically doesn't count. But if you painted as part of preparing the home for sale or it was extensive work that significantly improved the appearance, some tax professionals argue it could be included. Keep detailed records of everything - receipts, contracts, etc. The IRS likes documentation. Even if some expenses don't qualify as improvements, having good records shows you're being thorough and honest. In your case, with the HVAC replacement alone, you're probably looking at several thousand dollars you can add to your basis, which reduces your gain even further. When in doubt, include the improvement costs that clearly qualify (like the HVAC) and be conservative about borderline items like painting unless you have a tax professional review it.