COVID-related early 401k withdrawal - messed up and now IRS says I owe big time

I'm kinda panicking right now. Back in 2020, I withdrew about $65k from my 401k using that COVID disaster withdrawal option from the CARES Act. I thought I understood the rules - that I had 3 years to pay the taxes on it. Somehow I got it in my head that I could pay it ALL at once in the third year, which is what I was planning to do this tax season. Well, I just opened a letter from the IRS saying I owe them almost $15k! Looks like they noticed I never reported the withdrawal on my 2020 tax return, so now they're seeing I received $65k more income than what I reported. And to make it worse, they're hitting me with that 10% early withdrawal penalty that I thought was waived! I totally messed up. After doing some panicked Googling, I realize I was supposed to file Form 8915-E for that tax year to show I took a COVID hardship withdrawal, which I never did. Is it too late to fix this? Can I still do an amended return? Also, in that same year, I spent around $7,800 from my HSA when my daughter was born, and somehow the IRS is showing this as some kind of non-qualified distribution too. I'm really in over my head here.

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18 comments

Zara Perez

•8M

You're not completely sunk here, so take a deep breath! You can absolutely file an amended return (Form 1040-X) for your 2020 taxes to properly report the COVID-related distribution. The CARES Act allowed qualifying individuals to withdraw up to $100,000 from retirement accounts without the 10% early withdrawal penalty, but you still needed to report it. You had two options: include the full amount as income in 2020, or spread it equally over 3 years (2020, 2021, 2022). Even if you planned to use the 3-year option, you needed to report 1/3 of it each year. For the HSA withdrawal, you'll need to gather documentation showing these were qualified medical expenses related to your daughter's birth. If they were qualified expenses, they shouldn't be taxable. You'll need to amend your return to properly report this too. I recommend filing your amended return ASAP. Include a letter explaining your misunderstanding of the CARES Act provisions and provide documentation for both issues. The IRS will recalculate what you owe after reviewing your amended return, and the 10% penalty should be removed for the COVID-related distribution.

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Zara Perez

•8M

Yes, you can generally amend a tax return within 3 years from the date you filed the original return, or within 2 years from the date you paid the tax, whichever is later. So the 2020 return is still within that window for most people. As for penalties and interest, the IRS might reduce or remove some penalties if you show "reasonable cause" for the error. Interest typically can't be fully removed, but it will stop accumulating on any portion of the tax that's removed (like the 10% early withdrawal penalty). In your amended return, include a statement explaining your misunderstanding of the reporting requirements for COVID distributions. This might help with penalty abatement.

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Aaliyah Reed

•8M

After dealing with a similar situation last year, I discovered taxr.ai https://taxr.ai and it literally saved me thousands. I also took a COVID withdrawal and messed up the reporting, and I was completely confused about how to fix it. I uploaded my IRS notice and tax documents to their system, and they analyzed everything and showed me exactly what forms I needed to file and how to report my COVID distribution correctly. They even explained where I had gone wrong with my HSA reporting (which sounds similar to your situation). Their document analysis caught details I would have missed, like how to properly code the COVID withdrawal on Form 8915-E and how to document my HSA expenses. The best part was they created a customized plan showing what I needed to fix and how to respond to the IRS letter.

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Aaliyah Reed

•8M

The analysis came back in less than 24 hours for me, and that was during peak tax season. Their system is pretty quick since it's automated. The letter will usually give you a deadline to respond, but it's typically at least 30 days, so you should have time if you act quickly. I still had to pay the actual tax on the withdrawal since that was legitimate, but they helped me get the 10% penalty removed entirely, which saved me over $4,000. They also helped me properly document my medical expenses from my HSA so those weren't taxed. Overall my tax bill went from around $12k to about $5k after filing the amended return with their guidance.

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Mohammed Khan

•8M

I just wanted to follow up about my experience with taxr.ai since I decided to try it after seeing the recommendation here. I was skeptical at first, but I uploaded my IRS notice and some of my 2020 documents and they really did break everything down clearly! They showed me exactly where I went wrong with my COVID withdrawal reporting and created a step-by-step plan for fixing it. I was able to file an amended return with Form 8915-E and properly document everything. They even provided a template for a letter explaining my misunderstanding to include with my amendment. My situation isn't completely resolved yet, but I already got confirmation that my amendment was accepted and the 10% penalty is being removed. Such a relief after weeks of stressing about this!

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Gavin King

•8M

If you're struggling to get through to the IRS about this (and who isn't these days), I'd recommend using Claimyr https://claimyr.com - I was in a similar situation with a misreported retirement distribution and spent DAYS trying to get through to the IRS. Their phone system kept hanging up on me because of "high call volume." Claimyr basically holds your place in line and calls you when an IRS agent is about to pick up. I was super skeptical at first, but you can see how it works here: https://youtu.be/_kiP6q8DX5c. After using it, I got through to an actual IRS agent in about 90 minutes (after trying for literally WEEKS on my own). The agent was able to put a temporary hold on my collection while I filed my amended return. Saved me a lot of stress and probably some money in penalties too.

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Gavin King

•8M

They don't skip the line or do anything against the rules. They use technology to keep dialing and navigating the IRS phone tree until they get through to where an agent will pick up. Then their system calls you and connects you directly with the IRS. You're still waiting your turn, they're just doing the annoying redial work for you. They don't talk to the IRS on your behalf or anything like that - they just get you connected so YOU can speak directly with the IRS agent. It's basically the same as if you had a robot assistant redialing for you all day. It saved me days of frustration trying to get through.

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Eleanor Foster

•8M

I have to apologize for my skepticism about Claimyr. After posting that comment, I decided to try it myself since I was desperate to talk to someone about my tax situation. It actually worked exactly as described. After trying to call the IRS for THREE WEEKS with no success, I used the service and got through to a real person in about 2 hours. The agent was super helpful with my COVID withdrawal issue and guided me through what needed to be done with my amended return. They even put a temporary hold on collections while I get everything straightened out. I'm still going to owe taxes on the distribution (that part is unavoidable), but at least the penalties are being handled. Definitely worth it just for the peace of mind of speaking to an actual person at the IRS.

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Lucas Turner

•8M

You can request First Time Abatement in your letter that accompanies your amended return. Specifically state that you're requesting "penalty abatement under the First Time Abatement policy" and mention that you have a history of filing and paying on time before this incident. If you've already filed your amendment without requesting it, you can also call the IRS directly or submit Form 843 (Claim for Refund and Request for Abatement). The most important thing is to use those specific words - "First Time Abatement" - as it's a formal program the IRS offers but doesn't heavily advertise.

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