This happened to my brother! His construction job gave him a weird W2 that was mostly empty and later claimed he was "1099" but never gave him an actual 1099. He had to pay all the taxes himself and it was a nightmare.

This is a really good point! So for documentation purposes, would things like rental listings, a copy of the lease agreement, and property management contracts be sufficient? My property was vacant for about 2 months between when I moved out and when I found tenants, so I'm not sure exactly when it counts as "placed in service.

Yes, those documents would be excellent proof. The IRS considers a property "placed in service" when it's ready and available for rent - not necessarily when you actually get a tenant. So if you moved out, did any needed repairs/updates, and then listed it for rent, the property is considered "placed in service" on the date it was first available to rent (when you started advertising it). The key is being able to prove that date with documentation. Save copies of rental listings showing the date posted, emails with potential tenants, records of any improvements you made specifically for rental purposes, and definitely the final lease agreement. If you hired a property manager, their contract and any correspondence about listing the property would also be excellent documentation.

Did TurboTax automatically know to include the real estate commission from the original purchase? I'm using H&R Block software and it didn't specifically ask about that.

That's a good point! What specific things should I document to show I'm running this as a legitimate business? I definitely want to turn a profit, but it's taking time to build up my designs and customer base.

You should keep track of how many hours you spend working on the business each week, have a separate business bank account, maintain professional records of income and expenses, create a business plan with profit projections, and document your marketing efforts. Also consider getting business cards, a business website or professional social media presence, and perhaps even form an LLC if you're serious about it long-term. The key is demonstrating that you're approaching this in a businesslike manner with the intention to make profit, even if you haven't gotten there yet. The IRS typically looks for profitability in 3 out of 5 years, but showing these business practices helps even if you're still in the early stages.

One thing to note - computers are considered "listed property" by the IRS if they're not used 100% for business, so you'll need to track business vs personal use. If you use it more than 50% for business, you can still claim depreciation proportional to business use.

That's terrible advice. The IRS receives copies of all W2s and their system automatically matches them to tax returns. Just because your brother got lucky doesn't mean it's smart to intentionally ignore a known error. The penalties and interest will be much worse if you wait for them to find it.

I'm not saying it's the right thing to do, just sharing what happened in my brother's case. It's ultimately about risk tolerance. For small amounts, sometimes the IRS collection efforts cost more than they'd recover so they don't pursue it. You're right that the proper action is to file an amendment. I was just offering a different perspective based on a real experience. Everyone has to decide their own comfort level with risk.

It depends on your overall tax situation, but as a rough estimate, you'd owe your marginal tax rate on that amount. So if you're in the 22% bracket, that's about $528 plus potential penalties and interest. The penalty for not reporting it can be around 0.5% per month up to 25% of the tax owed, plus interest that compounds daily.

Thanks! That helps put it in perspective. Definitely not worth risking penalties over that amount. I'll go ahead and file the 1040-X.

It was definitely a direct transfer where I never received any funds personally - I just authorized the new bank to pull the funds from my old IRA. So sounds like I won't get a 1099-R either. But hypothetically, if someone DID receive a check and then deposited it in the new IRA within 60 days, how would they report that? Just curious for future reference.

In a direct transfer where you never received the funds, you're correct that you won't receive a 1099-R, and there's nothing to report on your tax return. If someone did receive a distribution check and then completed a 60-day rollover, they would receive a 1099-R from the first institution with distribution code G. They would need to report this on their tax return (generally on lines 4a and 4b of Form 1040), showing the full amount on line 4a but putting $0 on line 4b (since it's not taxable if properly rolled over). They would write "Rollover" next to line 4b to indicate why the taxable amount is zero. This ensures the IRS knows you received funds but properly rolled them over within the allowed timeframe.

This is so helpful, thank you! So just to confirm - when my tax software asks if I made any "contributions" to my traditional IRA this year, I should NOT count the rollover amount as a contribution, right?