Did you get any kind of confirmation number or anything when they approved it? I just submitted my request and realized I forgot to ask for some kind of reference number.

This is really helpful, thanks! Is there a difference in success rates between calling vs writing a letter for the FTA request?

In my experience, calling is generally faster if you can actually get through to someone. You'll often get an immediate decision during the call. The agent can check your compliance history on the spot and approve the FTA right then. Letters take much longer due to IRS processing backlogs - sometimes 8-12 weeks or more. However, the success rate is probably about the same either way. The FTA criteria are pretty straightforward, and if you qualify, you should get approved regardless of which method you use. One advantage of writing is that you have documentation of exactly what you requested. If you call, make sure to take detailed notes of who you spoke with, when, and what they said.

Would filing an amended return for 2023 be easier than trying to explain the situation on my 2024 return? I'm worried about triggering an audit if things don't match up properly.

Filing an amended return would create a cleaner paper trail, but it's probably more work than necessary in your situation. Since you already withdrew the excess before the deadline and didn't take a deduction for the excess amount on your 2023 return, the main issue is just documenting the nature of the distribution on your 2024 return. Attaching an explanation statement to your 2024 return is likely sufficient and much simpler than amending your 2023 return. The risk of audit is actually quite low for this situation. The IRS is primarily concerned that you didn't deduct more than you were entitled to (which you didn't) and that you properly report distributions (which you will with the explanation). This type of corrective action happens frequently with HSAs and isn't a red flag as long as you document it properly.

The excess contribution rules are the same whether you're self-employed or not. What matters is your HDHP coverage. Since your coverage didn't start until February, you'd need to prorate your contribution limit. For 2024, if you have individual coverage, you'd be limited to 11/12 of the $4150 limit, which is about $3804. So your $3900 would include about $96 in excess contributions that you should withdraw before the filing deadline.

Thanks for bringing this up - I hadn't even considered redemption timing issues. Is there any exception if the redemption is very small compared to the total outstanding shares? For example, if they bought back 2% of shares from a departing employee?

There is a de minimis exception for redemptions, but it's very limited. The exception only applies if the total value of stock redeemed within the relevant period doesn't exceed $10,000 OR 2% of the value of all outstanding stock at the beginning of the period. So for most businesses of meaningful size, that 2% threshold is really tiny. The safest approach is to ensure no redemptions have occurred in the look-back period. If there have been redemptions, you'll need to carefully analyze whether they fall within the de minimis exception or whether there's a qualifying exception for death, disability, or divorce (there are specific carve-outs for these situations).

Yes, this is a real concern! One way around this is to establish a separate entity for your excess cash/investments. The "active business" test requires that at least 80% of assets be used in the active conduct of a qualified business. If your cash reserves are getting too large, you could dividend out excess cash to yourself and then invest personally, or create a separate investment entity that wouldn't affect your QSBS-eligible company.

This finally makes sense! So basically I can't get both benefits on the same dollars - either the money is tax-free OR I can use it for LLC but not both. Would it be possible to split my qualified expenses? Like use $8,000 for tax-free fellowship treatment and the remaining $5,500 for the LLC calculation?

Exactly! You can absolutely split your qualified expenses to optimize your tax situation. You could allocate $8,000 of your qualified expenses to make that portion of your fellowship tax-free, and then use the remaining $5,500 toward calculating your Lifetime Learning Credit. With the LLC giving you a credit of 20% of your qualified expenses, that $5,500 would generate a $1,100 tax credit. You'd need to calculate whether this approach saves you more than making all $13,500 of your fellowship tax-free. It depends on your tax bracket, but credits are generally more valuable than exclusions from income.

I used TaxSlayer last year with a research fellowship and Lifetime Learning Credit. It worked fine but you have to be careful about how you enter the fellowship income. If you received a W-2, enter it as wages. If no W-2, you need to report it as "Other Income" and then separately indicate how much was for qualified expenses. For the LLC, make sure you're only claiming expenses that weren't already covered by tax-free scholarship/fellowship funds. TaxSlayer has a decent education credits section but doesn't always make this distinction super clear.

Thanks for the advice! I didn't itemize - I took the standard deduction. Would that have made a difference with how the gambling income was handled? I'm definitely saving everything from TurboTax, including recording our phone conversations (with their knowledge).

Yes, that makes a significant difference. Gambling losses can only be deducted if you itemize deductions, and even then, they're limited to the amount of your gambling winnings. Since you took the standard deduction, you couldn't deduct those losses at all, which means your AGI should definitely have included all the gambling winnings. This actually makes TurboTax's error even more clear-cut. They should have included all gambling winnings in your AGI calculation regardless of your losses or deduction choice. Definitely consult with a tax attorney - this is a textbook case of preparer error.

Did H&R Block end up covering any of your penalties or offering any compensation for their mistake? I'm dealing with something similar right now.