I just want to add some reassurance here - I've been through multiple IRS notices over the years, and the 12c letter is actually one of the easier ones to resolve. It's basically just a paperwork issue, not an accusation of wrongdoing. The fact that your CPA estimated $1,200 for 3 years but the IRS is billing $2,000 for one year suggests there might be more going on than just the missing Schedule 1. When you contact your CPA (which you should do TODAY), ask them to walk you through exactly what income sources they reported and how they calculated the tax liability. Also, don't let this experience discourage you from getting compliant with your taxes. Even if your CPA made some errors, you're still way better off having filed those returns than continuing to ignore them. The IRS is generally reasonable to work with when you're making a good faith effort to comply. One last tip: if your CPA is unresponsive or unhelpful about fixing their mistake, consider getting a second opinion from another tax professional. You shouldn't have to pay twice for the same work to be done correctly.

I went through this exact same situation about 6 months ago! Got a 12c letter asking for Schedule 1 to support some "other income" I had reported. Turns out my tax preparer had included the income amount on line 8 but completely forgot to attach the actual Schedule 1 form that explains what type of income it was. The good news is this is totally fixable and not as scary as it seems. Here's what worked for me: 1. I called my tax preparer immediately (don't wait!) and they admitted the mistake 2. They prepared the missing Schedule 1 at no charge since it was their error 3. I mailed it to the IRS with a copy of the 12c letter within 2 weeks 4. About 6 weeks later, I got a letter saying the matter was resolved The key thing is responding quickly - you typically have 30 days from the letter date. Don't let your CPA brush this off or charge you extra fees to fix their own mistake. As for the higher-than-expected bill, that's probably because the IRS can't properly calculate your tax without knowing what type of "other income" it is. Some types are taxed differently than others, and without the schedule, they might be defaulting to the highest tax treatment. Once you provide the missing form, they should recalculate everything correctly. You've got this! It's just a paperwork hiccup, not a major tax problem.

One thing nobody's mentioned - your uncle should check if his state offers any small business retirement or transfer tax incentives. Here in Pennsylvania, we have programs that provide tax breaks for long-term business owners selling for retirement. Also, make sure his accountant is considering his basis correctly. The $65k purchase price plus documented improvements of $270k should both count toward his basis. Sometimes accountants miss some of the capital improvements if they weren't all properly categorized over the years. And definitely get a second opinion! I got three different tax estimates when selling my landscaping business, with the amounts varying by over $40k between professionals.

Your uncle's situation is unfortunately very common with long-term small business owners. That $135k tax bill on a $675k sale actually breaks down to roughly 20% effective rate, which isn't as outrageous as it first appears when you understand the components. The key issue is that over 34 years, your uncle likely claimed hundreds of thousands in depreciation deductions on his tax returns - both on the original building/equipment and all those renovations. Every year he owned the business, these deductions reduced his taxable income, saving him money at his then-current tax rates. Now the IRS wants those tax savings back through "depreciation recapture" at 25%, plus regular capital gains tax (15-20%) on any remaining profit. It's not a penalty - it's the government collecting on tax benefits he received over three decades. A few suggestions: 1) Verify his accountant calculated the basis correctly (original $65k + documented $270k improvements should total $335k basis), 2) Consider if any improvements qualify for different depreciation schedules, 3) Explore installment sale options to spread the tax over multiple years, and 4) Definitely get a second opinion from a CPA who specializes in business sales. The silver lining is that without those annual depreciation deductions, his taxes would have been much higher every year he operated the diner.

Quick question - I'm facing a similar issue with my leased F-250 - does anyone know if TaxAct has a specific section for handling lease inclusion amounts for heavy vehicles? I can't seem to find it anywhere in the business vehicle section.

Just went through this exact same situation with my leased Ram 2500 last month! The key thing that helped me was realizing that in TaxAct, when you're in the vehicle section, you need to make sure you select "leased" rather than "owned" early in the process. Once you do that, it should give you the option to deduct actual expenses (your lease payments) rather than forcing you into depreciation calculations. If it's still asking for depreciation methods after you've indicated it's leased, try going back to the vehicle type selection and make sure it's properly categorized as a business lease. The software sometimes gets confused if you accidentally indicate mixed personal/business use or if the initial setup wasn't clear about the lease vs purchase distinction. For the inclusion amount that others mentioned - TaxAct should calculate this automatically once you've entered the vehicle's fair market value and lease terms correctly. You shouldn't have to do any manual calculations for that part.

Is anyone else annoyed at how confusing our tax system is? Like why do we need so many different forms? In other countries the government just sends you a statement with everything already calculated and you just verify it!

I totally get the confusion! This is actually one of the most common tax questions new filers have. Just to add to what others have said - think of it this way: your W-2 is like a receipt showing what you earned and what taxes were already taken out of your paychecks. The 1040 is like your final tax calculation where you figure out if you owe more money or if you get a refund. The good news is you did everything right! When you "submitted online," you were filing your 1040 tax return (which used the info from your W-2). The physical 1040 copy is just for your records - definitely keep it safe for at least 3 years like others mentioned. And don't worry about feeling confused - even people who've been filing taxes for years sometimes mix up the terminology. The important thing is your taxes are filed correctly!

Quick question - does anyone know if the returned earnings portion of the excess contribution is subject to the 10% early withdrawal penalty if you're under 59½? My plan administrator told me it might be, but I'm getting conflicting information.

This is a really complex situation that trips up a lot of people! I went through something similar last year and want to add a few practical tips based on my experience: 1. Get everything in writing from HR - specifically the date they're processing the correction and confirmation about the W-2 correction that Zainab mentioned. My HR initially said "early 2025" which wasn't specific enough to determine if it fell within the 2.5 month window. 2. The 1099-R you receive will be key - it should have distribution code "8" in Box 7 for excess contributions returned due to failed ADP/ACP tests. Make sure to keep this with your tax records. 3. Don't forget that if you're getting earnings returned too (which is common), those earnings are taxable as ordinary income for the year being corrected (2024 if done by March 15, 2025). The earnings portion may also be subject to the 10% penalty if you're under 59½. 4. Consider talking to a tax professional if the amounts are significant. The interaction between the returned contributions, earnings, and how they affect your tax liability can get pretty complex, especially if you're near certain income thresholds for other tax benefits. The 2.5 month rule is real and it's specifically in the IRS regulations for 401(k) plan corrections. Your HR person is correct about the timing impact on which tax year is affected.