IRS say I owe $1200 from 2010 - HELP!

[Angel!]

I just got a letter saying I owe $1200 because of a $4600 health savings account distribution & I am kind of freaking out right now.

Somebody tell me this is wrong. I thought the point of an HSA is it is not taxed, so why would I be taxed for spending it. Do I just have to prove to the IRS it was spent on medical related stuff?

What is worse, if I do owe this, then I probably owe that on 2011 too.

I am going to read the rest of the info & try to calm down now.

[TD2K]

You might want to pose this over on Tax Corner also. What's the background, did you take the money out for a large medical payment or how did the 'disbursement' occur, did you take it out as cash, was it via a check, etc?

[moon/Laura]

i'm moving this thread to the tax board... no need to double post.

[Angel!]

About $1500 was a check I wrote to myself at the end of the year & I have all the receipts for that withdrawal. Everything else was payments made directly to doctors & pharmacies, etc.

[sbcalimom]

It is probably because you wrote a check to yourself. I did that one time for a much smaller amount. I spoke to a rep at the administrator about it beforehand and they just said to make sure I kept all receipts for the amount I was reimbursing myself. They said sometimes when you write a check to yourself the IRS will come back and say it is not qualified without proof that it was for a medical expense.

If there isn't information with the notice on how to dispute it, I'd try calling whoever holds the HSA and see if they can give you some guidance on what to do.

[quince]

Did you file the correct form for those tax years indicating the amount of distributions for qualified medical expenses? Banks file forms with the IRS letting them know the distribution amounts, and I'm sure they match that up to personal tax filings to make sure that people are accurately reflecting their account withdrawals.

I think it's form 8889. Line 10 is the one for the distributions...

ETA: If you didn't file it, you can revise your return, I believe.

[mwcpa]

simple way to correct....

when one takes a distribution from an HSA those moneys must be disclosed on a form 8889 as noted by quince above....

look at part 2 of the form (link here www.irs.gov/pub/irs-pdf/f8889.pdf). if you do not tell the IRS that you used the money for qualified medical expenses (expenses that you cannot double dip with on schedule A or an FSA or insurance reimbursement or other) then they can only assume it was a non qualified withdrawal.

for 2010, complete a form 8889, there is no reason to send in "proof" of the medical expenses at this time, that may only lead to confusion, but be prepared, if they ask to substantiate the costs incurred. Again, if you claimed the out of pocket medical costs that you were reimbursed for by the HSA and took the benefit elsewhere you may have a lot more things to correct. Do not amend the 2010 tax filings at this time for any other errors, simply reply to the IRS and note you forgot to include the 8889, if you used a pro and they messed up, have them reply (if you did not give them the "distribution form" do not blame them, I cannot count the times I get blamed when a client fails to disclose something to me, but have them reply any way, it may cost a fee, but most pros know how to reply to the IRS). It will take IRS 6-8 (minimum) weeks to review the data you submit.

for 2011, as the 4-17 deadline is not here yet, if you already filed, simply file an amended return, attach the 8889 and correct any other errors.

best of luck....

[Angel!]

Thank you all. It appears the problem is I didn't file form 8889. I never received the 1099 form from the HSA account, so I had no idea I had to do anything for it & it was my first year with an HSA. I looked online & found the 1099s for 2010 & 2011. I will have to go back & file an amended return for 2011 . If only they had sent the letter a week earlier, then I could have fix my 2011 return before filing.

Hopefully this will take care of the problems.