Perseverance + Knowledge = Win

Filling out tax returns can be daunting, but getting a letter from the IRS is worse.

I haven't discussed this with many people because it was somewhat embarrassing and annoying. Now I'm ready to share my success and for your learning. Since sometime in 2024, I have been fighting with the IRS over my 2022 tax return. They said I owed them $4,125, and I said I owed them maybe $100, if that. So what happened?

Around the time that I got into investing, paying off debt, and getting things in order, I got a little excited and opened up a Roth account. A Roth account is a great way to invest after-tax dollars, since you pay the tax now on the money you earn, but then pay nothing when you take them out after age 59.5. GREAT IDEA! Except, I was over the income limit to use a Roth. Thankfully, later that year, I realized my mistake, did a little research, and just pulled the money out and moved it into a general brokerage account (standard investment account for mutual funds, individual stocks, etc.).

Unfortunately, when I did this, I did not realize I had to do it in a specific way, so Fidelity filed a 1099-R (Retirement Income). When the IRS reviewed my return, they claimed I received early retirement distributions, which meant I needed to be taxed on the income, plus a penalty for taking them before age 59.5.

Now, with my shock, I gathered my statements, showed my evidence, and responded to the letter with all the evidence. They responded back with the same tax bill, and this continued on for almost a year, back and forth, same bill, same reply.

I finally even considered talking with a tax attorney, figuring $1,000 attorney bill would be better than a $4,000+ IRS bill. Ultimately, when I read the last letter, there was an offer to file a court case, so I decided to do a little research, file the court case, my evidence, and forget the tax attorney. So in March, I did just that and dealt with another round of legal letters, which, to be honest, are annoying. I responded to their claims and my evidence, and then let it be, awaiting my day in tax court.

Finally! Last month, I got a call from a lawyer about a settlement, and much to my surprise, they agreed with my support and waived any bill...I owe nothing! Phew! What did I learn?

1) Doing my taxes has given me the knowledge I needed. I know most people would say, well, a tax professional would have caught this, but to be honest, not necessarily. They are only as good as the information you give them, so no guarantee. I was able to read my tax return, understand the letters, and find my mistakes with a little extra research.

2) Do not be afraid! Most people stay away and pay tax pros $200-300 a year to file taxes because they do not want to deal with this stuff. Are taxes a pain? Yes, but the knowledge you gain as you work through them will help you better understand your home finances.

3) Perseverance! There were many times I was ready to just pay the bill and be done because my wife started getting letters, too, phone calls, and it was getting out of hand. But I was confident in the knowledge built up and was ready to go to court before giving in. Stay the course and see it through.

It is ok to seek help! I'm no tax pro, and I was ready to talk to a tax attorney, but the $500 initial investment to get started was not worth it to me. If the bill was, say $10,000, I may have continued that way.

Build knowledge, stay the course, and ultimately, you can come out on top. Not always, but if you do not stay the course, you will never know.