Hello,
I just received a CP2000 tax notice from the IRS stating I owe a significant amount of money for self-employment taxes. I disagree that this situation would fall under self-employment and wanted some other opinions.
I enjoy reversing computer programs to understand how they work as a hobby. In early 2020, while reversing a closed source program that runs on iPhones and Macs by default, I discovered a serious security vulnerability. I responsibly disclosed this bug to Apple's security teams. 5 months later, Apple fixed the bug and decided to pay me a very significant sum as a reward under their bug bounty program: https://developer.apple.com/security-bounty/. I received a 1099-NEC from Apple at the end of the year with this bounty amount.
I reported this amount as additional income to my primary, unrelated job and paid income taxes, but as I believed this to be a sporadic/hobby activity that stumbled me into a lot of money, I didn't pay self-employment tax. I just received a notice for self-employment taxes from the IRS including a very large penalty.
Based on my understanding of the IRS rules, I do not think this qualifies as self-employment for the following reasons:
1. It was not continuous work. I was just reversing some program on my computer and found a bug. Total time spent was <2 hours
2. It was not profit seeking. I reported the bug to Apple to fix a huge security gap and get a CVE with no guarantee of reward or payment
3. It was only after 5 months that Apple decided to fix the bug and offered to pay me for reporting it responsibly.
4. This is the only bug bounty I've received. I do not have any other income ever reported for bug bounties
5. This is completely unrelated to my full-time job
For the professionals in here, do you think this qualifies as self-employment and thus should need self-employment tax? And if not, what are your recommendations for how to respond to the IRS notice?
Thank you for all of the help!
