Fun reading this, but given the facts you describe, it would be a crime.
Also, not sure how rich the rich person is in your scenario, but they may lose some of their estate tax exclusion depending on the numbers, even if you could successfully prove these transfers back and forth were unrelated (which, you wouldn’t be able to).
He could gift you his half prior to any sale. Of course then it is all yours, and trying to split the proceeds creates the same issues regarding reciprocating gifts.
We already sold it. The opportunity was at the time of purchase when I could have bought it in my name with half his funds (which is way less messy than two of us each buying half, then one of us selling their half or gifting it). The funds transfer before the purchase could later be explained as, he loaned me money and then I paid him back and gave a gift as a thank you. Especially since I didn’t need his funds to fully finance the purchase, so I could have asked for them after closing. Oh well. It’s not like we knew for sure what my income would be in the sale year when we bought it. Hindsight’s 20/20. It wasn’t as large a gain as in my example. You just hate finding out that your family gave money to uncle Sam that they could have kept.
Thank you, Mrs. Robinson. 
Evasion. As a general rule, if it wouldn’t work as an arms-length transaction it’s probably not acceptable.
I got one that kind-of falls into something similar to “evasion or avoidance”… and I didn’t want to start a new thread.
Received an IRS notice CP12 which claims I made a mistake on my 2021 return. I have a Schedule H for one employee with wages > $2500. My understanding per this and this is that if 2021 wages exceeded $2300 (the links show $2400, which is for 2022), then I was supposed to withhold and pay SS and Medicare taxes. The notice says “the amount of cash wages reported on Schedule H was not enough to be considered taxable for employment tax purposes”, so they will refund the employment taxes and I should return half to the employee.
I’m 100% sure they f’ed up, because the wages are way above the threshold, and because I used my spreadsheet and H&R Block to file (print and mail). I downloaded the transcript and the numbers for Schedule H look correct. I did find one number on form 2441 was fat-fingered / mis-scanned, but it shouldn’t make any difference for Schedule H calculations. The question is – do I proceed as the notice suggests (file a corrected W-2C for the employee and refund the money withheld from their paychecks), or do I attempt to dispute? One concern is that once I refund half to the employee who no longer works for me, I won’t be able to get it back. Since I did everything right and the IRS f’ed up – would they be able to reverse this in case of some future audit and send me a bill?
ETA: Further, if I issue a W-2C, then the employee might have to file their own tax return and pay the employment taxes anyway. What a PITA.
I’d do what they say and leave it at that. For all you know, there was a special temporary covid relief measure that prompted the correction. Keep the letter, and if anyone ever asks you did exactly as they instructed.
can you do this with poor relatives?
I was aware of most measures that applied to me and didn’t see anything like that. Plus I updated the tax software before filing, because, IIRC, there was indeed some last minute change I was waiting for.
Do what, hire them as household employees? You can, but there’s usually no write-off, and there may be exceptions for immediate family like spouse, parents, or children. We hired a babysitter. My understanding is that most people pay them cash “under the table,” because it was not easy to figure out how to do payroll taxes myself. One reason for doing it by the book is I have a Dependent Care FSA from work, which is pre-tax. The tax savings are hardly worth the effort though, due to employment taxes (OASDI, FUTA and California UI, SDI, and ETT) that I had to pay on top of wages. CA requires quarterly reports and payments, and reporting and issuing a W-2 for the federal items is done through SSA by the January 31 deadline.
I actually got a human recently when calling the number on the CP12 (for a client of mine) when I called first thing in the morning. Was on hold less than 20 minutes. Might as well call in and say the same thing you said here, “I paid this employee above the threshold, but you are saying I didn’t. Can you explain it to me?” If the person says to just follow the letter, then that’s pretty much what you have to do.
I suspect this phone call will “cost” me a few hundred bucks, which is why I’m asking whether I should call or just treat it as a bank error in my favor 
Did you really need to ask that question? The answer is absolutely yes.
Keeping the CP12 notice may, or may not, help you. Ultimately, if you ended up going to Tax Court, you’d probably win, but you don’t want to do that.
With ?? thousand new agents trying to justify their jobs, they will be keen to find fines, interest, and taxes. Consequently, I would make certain they’re not screwing up before following their advice.
Good luck!
I’m confused - are you wanting to correct the error and pay the money, or do you want to just let it go and keep what they tell you your supposed to get back?
They’re telling you how it is. You’ve confirmed they have the correct numbers (that, say, $12,000 didn’t scan as $1,200). It’s ok to assume you missed something; it’s your option to appeal their corrections, not your obligation.
What are they going to fine him for? It’ll be brand new territory if the IRS fines a taxpayer based on adjustments the IRS made to a return rather than the return the taxpayer filed.
This is what I was trying to figure out.
Unless the taxpayer knew, or should reasonably know, that the IRS had made an error.
Yeah, I disagree with it but it’s somewhere in the tax court records, and it’s been there for over 30 years. It’s “kind of” like the bank saying your $15k deposit was for $150k. You can point out their error, to them, in writing, but regardless of their ignorance, you’re still on the hook for a certain period of time.
Well, I have a reasonable suspicion, but I can’t possibly “know.” The transcript shows lines for what appear to be computer-calculated values (the values are listed like this: “taxpayer abc $xyz.00”, “computer abc $0.00”), suggesting that the computer decided the value should be zero. The computer is never wrong 
.
As much as I would like to let a thread go by without a nitpick …
Is this evasion or avoidance
It doesn’t matter. IIRC, the IRS considers either to be equally abhorrent/illegal/lock-up-able. What you want is tax minimization. That’s legal, at least vocabulary-wise.
He will remain on the hook for the correct tax, of course. They arent going to fine him for underpaying when he in fact paid the correct amount on time but they took it upon themselves to adjust it and return a refund.
Just like that bank error in your favor - you need to repay that erroneous $150k deposit, but you arent going to get charged with theft for waiting patiently for the bank to fix their own error. The theft charge comes when you spend the money you know isnt yours, or otherwise refuse to return it. In fact, trying to give it back proactively often only creates more issues.
As long as scripta accepts the fact he isnt all-knowing 
, he has valid pretext to assume the IRS merely fixed a mistake he overlooked. If they ever decide their adjustment was a mistake, he will gladly (or maybe not so gladly) hand over the tax due.
Not gladly, because I will have returned half to my employee that I would not be able to get it back. This is another thing I was asking – if the IRS figured out that they (their computer) made a mistake, could I still be held liable for that mistake?
What do you mean, the phone call will cost you? Meaning they will straighten things out and you won’t get the refund, half of which you have to give back to your employee? That’s not costing you anything. You already paid them the money.
This is why it isn’t costing you anything making the call. If you don’t make the call and just do what they say, even though what they say is wrong, what is stopping them from fixing their mistake and coming after you for that money that you won’t be able to recover. The phone call is saving you from having to worry about this, not costing you money.