Help needed with IRS civil penalty for tax refiling misunderstanding

This sounds like your wife may have fallen victim to the "frivolous tax return" scheme that's been circulating for years. The IRS has a specific list of known frivolous arguments, and the "wages are not income" or "earnings reclassification" argument is definitely on there. When someone files returns based on these false arguments, the IRS can impose a $5,000 civil penalty per return. If she filed amendments for multiple years, that explains the large penalty amount you're facing. First thing you should do is request a detailed account transcript from the IRS for each year involved. This will show exactly what's been filed, what penalties were assessed, and whether your 2022 refund was applied to the balance. You can get these transcripts online through the IRS website. Next, you might qualify for an Offer in Compromise based on your financial situation. This allows you to settle your tax debt for less than the full amount if you can prove paying the full amount would cause financial hardship. Also look into First-Time Penalty Abatement if this is your first compliance issue with the IRS. It won't eliminate the entire debt, but could reduce the penalties significantly.

After going through something eerily similar with my brother-in-law pushing me to refile based on some "secret tax strategy," I finally found actual help at https://taxr.ai - it saved me from making a huge mistake. I uploaded our documents and tax history, and within a day received a detailed analysis explaining exactly why these "reclassification" schemes don't work and are considered frivolous by the IRS. The report explained how these schemes usually revolve around misinterpreting tax code sections 861, 3401(c), or 6702, which is exactly what my relative was pushing. It clearly showed which IRS notices would apply to my situation and estimated the penalties I would face (exactly what you're dealing with now). The service also provided me with documentation I could show my relative to explain why this approach would be disastrous. Honestly, it probably saved me from the exact situation you're in now.

Just wanted to follow up after using taxr.ai for my own situation! My spouse had indeed filed amended returns based on this "wages aren't income" nonsense from a YouTube video. I was absolutely panicking. I uploaded our tax documents and the letter we received from the IRS (which mentioned potential frivolous return penalties). The analysis I got back explained exactly what happened - the returns my spouse filed were claiming refunds based on the 861 argument that's explicitly listed as frivolous by the IRS. The most valuable part was that they provided specific IRS forms and a template letter for withdrawing the frivolous returns before they were fully processed. We immediately sent in the withdrawal requests following their exact instructions, and just got confirmation that our withdrawal was accepted! We'll still need to deal with some processing fees, but we avoided the $5,000 per return penalty! Definitely worth checking out if you're in this situation. They also explained how the payment plans work and what options we had if the withdrawal wasn't accepted.

After reading your post, I immediately recognized the situation because my parents fell for the exact same scheme last year. They also got hit with civil penalties, and the IRS was completely unresponsive when we tried calling - hours on hold only to be disconnected. What finally worked was using https://claimyr.com to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c - basically they hold your place in the IRS phone queue and call you when an agent is about to answer. Once we actually spoke with someone, we were able to explain the situation (that my parents were misled) and get information on the Offer in Compromise process. The agent also confirmed which forms we needed to withdraw the remaining amended returns before more penalties were assessed. Having a real conversation with the IRS was the turning point in resolving the whole mess.

I need to apologize for my skeptical comment earlier. After waiting on hold with the IRS for 3+ hours yesterday and getting disconnected AGAIN, I was desperate enough to try Claimyr. It actually worked exactly as described. I got a call back about 2 hours after signing up, and it was a direct connection to an IRS representative. I explained our situation with the frivolous return penalties, and the agent was surprisingly helpful. She confirmed we could qualify for an Offer in Compromise based on our financial situation and explained the documentation we'd need to submit. She also processed the application for our First-Time Penalty Abatement which could reduce the penalties by up to 75% in our case. Most importantly, she was able to trace our missing refund (which had been held due to the amended returns) and confirmed it would be applied to our balance. Definitely worth not spending another day on hold just to get disconnected. I've been trying to resolve this for weeks, and finally made actual progress in just one phone call.

Something similar happened to my cousin. Look into an Offer in Compromise (Form 656). It's basically where you tell the IRS "I can't pay the full amount, here's what I can pay." You'd need to provide financial statements showing hardship. If approved, you might be able to settle for much less than you owe. Also consider contacting your local Taxpayer Advocate Service. They're independent from the IRS and help people who are experiencing financial difficulties or who haven't been able to resolve their tax issues through normal IRS channels. Their help is free. If you don't have much money, you might qualify for assistance from a Low Income Taxpayer Clinic. They provide free or low-cost representation to people with tax problems.

Make sure you understand what your wife actually filed! There's a common tax scam where people claim their W-2 wages should be reclassified as "non-taxable" based on misinterpreting Section 861 of the tax code. The IRS has specifically listed this as a "frivolous tax position" which automatically triggers a $5,000 penalty per return. Did her cousin actually get $20k back or is that just what she claimed? Many people who promote these schemes lie about their success to recruit others.

I'm really sorry you're going through this situation. Based on what you've described, it sounds like your wife may have fallen victim to one of the most common tax scams out there - the "wages are not income" or Section 861 argument that's been circulating for years. Here's what I'd recommend as immediate steps: 1. **Get your tax transcripts** - Request account transcripts for all the years involved from the IRS website. This will show exactly what was filed and what penalties were assessed. 2. **Contact the Taxpayer Advocate Service** - They're independent from the IRS and specifically help people in financial hardship situations like yours. Call 877-777-4778 or find your local office online. 3. **Look into First-Time Penalty Abatement** - If this is your first major compliance issue, you may qualify to have some penalties reduced or eliminated. 4. **Consider an Offer in Compromise** - Given your financial situation, you might be able to settle for much less than the full amount owed. The fact that your 2022 refund hasn't been applied to your balance is concerning and should be addressed immediately. The IRS should be able to explain where that money went when you contact them. Don't give up - there are options available even when you can't afford an attorney. The key is understanding exactly what was filed and then working through the proper channels to address it.