Did you have to pay penalties when you withdrew the excess contribution? I'm in a similar boat and wondering what the damage might be.

No penalties as long as I withdrew the excess contribution (plus any earnings on that amount) before I filed my taxes for that year. The earnings were treated as taxable income, but that was minimal in my case. If you've already filed or it's been longer than your tax deadline, there's a 6% excise tax on excess contributions for each year they remain in the account. Don't delay dealing with it - that penalty can add up!

This is great advice. Our company did the same thing when the limits changed in 2022. HR sent out a notice that they were adjusting the deductible to maintain HSA eligibility for everyone. They said it was easier than dealing with all the payroll adjustment requests that would happen otherwise.

Have you ever had to provide these digital records to the IRS? I'm worried they might not accept them during an actual audit. Also, what software do you use for the scanning and organization?

I had a correspondence audit two years ago, and they fully accepted my digital documentation without issue. I submitted everything electronically through their portal and it went smoothly. I use a combination of a decent scanner app on my phone for receipts on the go, and a document scanner with automatic feed for batch scanning larger documents. For organization, I create yearly folders with subfolders for income, expenses, deductions, etc. I'm careful to make sure everything is clearly labeled and searchable. Most important is having a solid backup system - I use both cloud storage and local backups.

What's the deal with property records? I bought a house in 2019 and have all those closing documents taking up space. Can I scan and shred those too?

Property records are definitely in the "keep until you sell the property plus 3 years" category. This includes all your closing documents, records of improvements, and anything that affects your basis in the home. For your 2019 home purchase, these documents are absolutely critical to keep. If you eventually sell the home, you'll need to prove your basis (purchase price plus improvements) to calculate any potential capital gains. While you can certainly scan these for convenience and backup, I'd actually recommend keeping the physical originals of major property documents in a fireproof safe. These are the few documents where having the originals can really matter, especially for title-related paperwork.

So I need to separately file the 1040X through official channels while also responding to this notice? Does the 1040X need to be mailed to a different address than my response letter? And how do I make sure they connect the two?

Yes, you need to file the 1040X separately through official channels. The amended return should go to the IRS address specified in the 1040X instructions, which varies depending on where you live. For your response to the notice, send it to the exact address listed on the notice itself. In your response letter, specifically mention that you've also filed a 1040X and include the date you mailed it. Include a copy of the 1040X with your response letter as well (even though you're also mailing the original to the proper processing center). To help connect the two, include your notice number on both documents. Also, attach a clear explanation with both submissions that references the other submission. For example, on your 1040X write "This amended return is being filed in response to IRS Notice CP2000 dated [date]" and attach a copy of the notice.

Did you have to go through an official appeals process or did the explanatory letter work? I'm facing a similar issue and wondering if I should just skip straight to appealing.

We both kept the same jobs all year, so I don't think that's the issue. And we've always just taken the standard deduction - neither of us has enough deductions to itemize. But your comment made me realize we do have different pay structures. I get a base salary plus quarterly bonuses, and my wife gets paid hourly plus overtime. Could that be causing weird withholding calculations?

Yes, that could definitely contribute to the issue! Bonus payments and overtime are often withheld at a flat 22% rate for federal taxes, which might not be enough based on your combined income tax bracket. When you have variable income like bonuses and overtime, the withholding calculations can get tricky because payroll systems typically calculate each paycheck's withholding independently without considering your annual total. This is especially problematic when you file jointly, as the combined income from both regular earnings and variable compensation can push you into a higher bracket than what was used for withholding.

This! The refund isn't what matters - it's the total tax you're paying. A refund just means you gave the government an interest-free loan all year.

That's a really good point about comparing total tax liability instead of just refund/amount owed. I just checked and our combined total tax is actually about $800 less than what we paid separately last year! So I guess married filing jointly IS better for us, but our withholding was just way off. Definitely going to update both our W-4s with that "married but withhold at higher single rate" option. Thanks for the tip!

This is actually a really good point that I hadn't fully considered. I've been so focused on the "keep vs spend" part of the equation that I wasn't thinking about investment alternatives. What kind of returns should I be comparing against when making these decisions?

You should be comparing against what that money could reasonably earn if deployed elsewhere in your business or investments. For example, if investing that same $110k in new equipment or marketing could generate a 15-20% return, that's likely better than the one-time tax savings from a vehicle purchase. For many small businesses, having available capital for unexpected opportunities or challenges is also valuable. I've seen too many business owners become "cash poor" after making large purchases primarily for tax reasons, only to miss out on better opportunities later. It's about balancing immediate tax benefits against long-term business growth and flexibility.

That's a good saying! My dad always told me "nobody ever went broke by paying taxes, but plenty have gone broke trying to avoid them" lol