🆓 The IRS can forgive your penalty (if you ask)

Happy Almost-Fourth-of-July! We’re halfway through the year, which means it’s time to think about whether you’re on track for next April or quietly setting yourself up for a panic spiral. We’ve got both ends of the spectrum covered today.

This week’s lineup:

Tax Strategies

🧯 The IRS has a one-time penalty reset

The IRS doesn’t advertise this, but in 2026, there’s still a powerful escape hatch for certain tax penalties: First-Time Penalty Abatement.

If you’ve been compliant for years and slipped up once, the IRS may remove failure-to-file or failure-to-pay penalties without requiring an explanation. It’s not mercy. It’s policy.

To qualify, you need a clean record for the prior three years and must be currently compliant. That means filed returns, or extensions in place, and any tax due paid or on a payment plan.

FTA doesn’t cover everything. It won’t touch accuracy-related penalties or estimated tax penalties. But for filing and payment penalties, it can wipe the slate clean.

If you don’t qualify for FTA, Reasonable Cause Relief is the next option. This requires proof. Serious illness, disasters, and destroyed records can qualify. Forgetfulness and lack of money usually don’t.

Here’s the catch most people miss. The IRS applies FTA automatically before evaluating Reasonable Cause. That means if you have strong documentation for Reasonable Cause, you should push for that first. FTA is a one-time benefit. Once it’s used, it’s gone.

Requesting relief is straightforward. Many penalties can be removed over the phone. Larger penalties may require Form 843 and written documentation. Precision matters. Use IRS language. Be specific.

Interest is harder. It rarely goes away unless the IRS made a mistake. But if a penalty is removed, the interest tied to that penalty disappears too.

Most people never ask for relief. They just pay. That’s expensive.

👉 Learn more about administrative penalty relief

IRS Survival Guide

📱 The TikTok tax protest that ends with your HR department getting a letter

There’s a TikTok trend going around right now telling workers to claim “exempt” on their W-4, stop withholding federal taxes, park the money in a high-yield savings account, and pay their bill in April. Protest the government. Earn 4-5% in the meantime.

The financial math is already bad. The IRS underpayment penalty runs 7-8% right now, which is higher than most HYSAs are paying. So the strategy that’s supposed to earn you money on the spread actually costs you money before you add any other consequences.

But the legal math is worse.

“Exempt” on a W-4 isn’t an adjustment. It’s a declaration, a statement made under penalty of perjury that you had no federal income tax liability last year and expect none this year. If you expect to owe taxes (which is true of essentially everyone promoting this trend), signing “exempt” is a false legal statement. Federal law makes deliberately falsifying a W-4 a criminal offense: fines up to $1,000, up to a year of imprisonment, or both. The TikTok framing, “do this on purpose as a protest,” is not a legal defense. It’s documented evidence of intent.

The part that most people don’t anticipate: the IRS doesn’t just send you a bill. It has a Withholding Compliance Program that cross-references your W-2 against your filed return. When the numbers don’t reconcile, it can issue a “lock-in letter” directly to your employer, instructing them to withhold at a set rate regardless of what your W-4 says. Your employer is required to comply. The lock-in stays in place for a minimum of three years.

Your HR department gets the letter. They find out the IRS determined your withholding was incorrect. That’s the practical outcome of a protest framed as sticking it to the government.

The frustration behind the trend is real. The execution is a federal offense with paperwork that goes to your boss.

👉 Try out the tax withholding estimator

Businesses and Gigs

📉 Side business losses: When the IRS says, “Nice try”

Starting a side business is the easy part. Deducting the losses is where things get complicated.

If you’re reporting losses from a side gig on your Schedule C year after year, the IRS eventually starts asking a pointed question: is this actually a business, or is this a hobby you’re using to offset your W-2 income?

The distinction matters more than most people realize. Under the Tax Cuts and Jobs Act, hobby expenses are completely nondeductible through tax year 2025. But hobby income is still fully taxable. That means if the IRS reclassifies your business as a hobby, you owe tax on every dollar of revenue and can’t deduct a single expense against it.

The IRS uses a nine-factor test to determine whether an activity is a business or a hobby. The biggest factors: whether you’re operating in a businesslike manner (separate bank accounts, records, a real plan), whether you depend on the income, and whether the losses are due to startup costs or just ongoing spending with no realistic path to profit.

There’s also an informal presumption. If an activity shows a profit in three of the past five years, the IRS generally assumes it’s a business. If it doesn’t, the burden shifts to you to prove it is one.

That doesn’t mean every money-losing side hustle gets flagged. Legitimate businesses lose money, especially early on. But there’s a difference between a startup finding its footing and someone who sells twelve candles a year and deducts a home office, a vehicle, and $4,000 in “supplies.”

If you’re running a real business that’s genuinely in the red, document everything. Keep a written business plan. Track your hours. Show the IRS you’re treating it like a business, not a tax shelter with an Etsy page.

👉 Hobby or business? Here’s what to know about that side hustle

Wild Tax Tales

📸 An influencer was indicted for lying on his returns

A social media influencer was recently indicted on federal tax evasion charges, and the case reads like a cautionary tale for the entire creator economy.

The charges allege the influencer failed to report substantial income from brand deals, sponsored posts, and gifted products on his federal tax returns. Not a gray area. Not a misunderstanding with his accountant. A deliberate omission of income the IRS already knew about, because the brands that paid him reported those payments on their end.

That’s the part a lot of creators miss. When a company pays you $10,000 for a sponsored post, they file a 1099 with the IRS. When they send you $3,000 worth of free product in exchange for a review, that’s taxable income too, valued at fair market value. The IRS doesn’t need you to tell them about it. They already have the paperwork. They’re checking to see if you reported it.

The creator economy has grown fast enough that the tax infrastructure hasn’t kept up in some people’s minds. There’s a persistent belief that income earned through social media is somehow informal, that gifted products don’t count, that if you didn’t get a 1099 it doesn’t exist. None of that is true. Income is income. The platform doesn’t change the tax code.

This case is notable because it’s federal. The IRS didn’t send a letter. They sent a grand jury. The charges carry the possibility of prison time.

Most creators won’t face criminal prosecution. The IRS tends to pursue the most egregious cases. But “most” is cold comfort if you’re the one who gets the call. And every year the IRS gets better at matching 1099 data to returns.

If you’re making money creating content, report it. All of it. The free sneakers, too.

The quick (and slightly prickly) stories we didn’t have time to get to:

If you made it this far, you’re our kind of nerd. Hit reply and tell us which story you want us to dive deeper into next week.