Thanks for the advice! I didn't even think about documenting the physical location. I'll definitely take pictures next time my parents go there. Do you know if there's a way to check if someone has a valid PTIN? I looked at the paperwork again and don't see any ID number for the preparer.

There's no public database where you can verify PTINs unfortunately. If the preparer didn't include their PTIN on the return where it asks for "Paid Preparer's Information," that's a violation of IRS requirements right there. Take photos of the office exterior, interior if possible, and any signage showing the business name. If they have a website or social media presence, screenshot those too - these operations sometimes disappear overnight when they get reported. Also, if your parents paid by anything other than cash, that bank or credit card statement is valuable evidence of them using this service.

Did your sister end up reporting the preparer too? Just curious if anything actually happens to these people when they get reported or if they just keep scamming others.

Thanks for sharing your experience! That's really helpful to know someone else has been through this exact situation with Fidelity. I'm planning to follow the same approach you did. Just to confirm - did you include any special notes or attachments with your 2020 return to explain why you were including additional wage income that didn't match your W-2? Or did you just add it to Line 1 without further explanation?

I added the excess amount directly to Line 1 on my 1040 for 2020. My accountant also included a statement with the return that briefly explained the situation - basically noting that we were reporting excess 401(k) deferrals returned in 2021 as 2020 income per Publication 525. For my 2021 return, we included a more detailed statement explaining why we were reporting the 1099-R with code P but also including the offsetting negative entry. The key is making sure there's a clear paper trail showing you handled it correctly and aren't double-reporting or missing income.

Yes, it's handled quite differently after April 15th! If excess deferrals aren't distributed by April 15th of the year following the year of deferral, you end up with a serious tax headache. In your case, those excess contributions are now essentially "double taxed." They'll be included in your taxable income for the year contributed (2020) AND again when they're eventually distributed from the plan. Additionally, they're still sitting in your 401(k) where they're not supposed to be, which could potentially lead to a 6% excess contribution penalty each year until corrected. You should contact your plan administrator immediately to request a distribution of the excess amount, even though it's late. Some penalties might still apply, but getting it corrected now is better than leaving it uncorrected.

This is great advice. Do you think it's worth attaching a statement to my tax return this year explaining the situation, even though the actual correction will be reported next year?

In my experience, attaching a statement to your current year return isn't necessary and might actually complicate things. The IRS systems are set up to handle these corrections through their normal process - current year W-2 as is, then 1099-R next year. What's most important is keeping your own detailed records in case questions come up later. When I went through this, the IRS was only interested in my documentation when they had a specific question the following year. Adding extra explanations to your current return could potentially flag it for unnecessary review.

I used TurboTax last year for this exact situation. There's no special form for the current year - you just enter your W-2 as is. Next year when you get the 1099-R, TurboTax has specific questions that identify it as a return of excess contributions. It was pretty straightforward once I understood I didn't need to do anything special in the current year.

I tried this approach last year but got burned by wash sale rules when I tried to buy back similar investments after selling for losses. Any tips on avoiding that pitfall while still maintaining market exposure?

The key to avoiding wash sale issues is to sell investments at a loss and then buy something similar but not "substantially identical" to maintain your market exposure. For example, if you sell an S&P 500 index fund from one provider at a loss, you could immediately buy an ETF that tracks a different but similar index (like a total US market ETF) to maintain similar exposure without triggering wash sale rules. Another approach is to use the 31-day waiting period strategically. You could sell the underwater investment, move temporarily into a broader market fund for 31 days, then move back into your preferred investment afterward. The temporary investment gives you market exposure during the waiting period. This works well if you're rebalancing anyway or if you're willing to accept a slightly different allocation for a month.

This is actually a really important point that many people miss. It depends heavily on your investment timeline and the performance difference between your current funds and the ETFs you're considering. If your active funds consistently outperform the ETFs by even a small margin, that could outweigh the tax efficiency advantage.

Yes, we did call the police first! They came out and documented it, put one of those orange stickers on it, and told us we needed to wait 72 hours before having it towed. We followed all the proper channels. The police report actually said the car was reported stolen in another county, but for some reason the towing company still charged us because they said the owner didn't come claim it and they had storage fees.

That's good to hear! Since you followed the proper legal procedures, the expense would definitely qualify as an ordinary and necessary business expense for your rental activity. When you list it on your Schedule E, I recommend noting that proper procedures were followed and that it was necessary to maintain access to the property. While you probably won't need to provide that detail unless audited, it's good documentation to have.

The de minimis safe harbor election does simplify recordkeeping, but you still need to keep receipts! What it really does is allow you to immediately deduct small-cost items (generally under $2,500 per item or invoice) rather than having to capitalize and depreciate them. For example, if you buy a $200 microwave for your rental unit, you can deduct it immediately rather than depreciating it over several years. But you absolutely should keep those receipts - they're your proof if audited. The safe harbor is about how you treat the expenses, not whether you need documentation.