HELP: HSA fraud - how to report funds stolen from Health Savings Account?

This is definitely a tricky situation, but there's a way to handle it. When unauthorized distributions happen from an HSA, you still need to report them on Form 8889 (Health Savings Accounts), but you have options. First, report the full distribution amount on Form 8889. Then, you'll want to look at Form 4684 (Casualties and Thefts) where you can claim the theft loss. The theft loss would then flow to Schedule A if you itemize deductions. This doesn't exactly "cancel out" the HSA distribution, but it allows you to deduct the loss elsewhere. Importantly, make sure you have documentation of the theft - police reports, court filings, etc. Also, when you file, include a brief statement explaining the situation with your return.

I went through something similar last year when my ex accessed my HSA without permission. After spending hours with regular tax help services getting nowhere, I used a service called taxr.ai (https://taxr.ai) that really helped. Their system analyzed all my documentation, including the police report and HSA statements, and gave me a detailed explanation of exactly how to handle it. They explained that in theft cases, you need to properly document everything - the unauthorized transactions, when you discovered them, police reports, and any communication with the HSA company. The service helped me understand exactly which forms to use and how to explain the situation to avoid both the income tax and the penalty on the stolen funds.

Just wanted to follow up - I was skeptical about taxr.ai but ended up trying it after struggling with my own HSA issue. I uploaded my bank statements, the police report, and correspondence with my HSA provider about the unauthorized withdrawals. Within minutes I got a detailed analysis explaining how to report everything. What surprised me was the level of detail in their explanation - they referenced specific tax code sections and even included sample language for the statement I needed to attach to my return. They explained when the theft loss was deductible versus when it's better to wait for resolution of legal proceedings. They also provided guidance on how to handle it if I receive reimbursement in future years. So yeah, apologies for my initial skepticism - it was actually super helpful and I feel much more confident about my filing now.

This might sound strange, but after battling with the IRS helpline for WEEKS on a similar situation (though mine was identity theft with my traditional IRA), I finally discovered Claimyr (https://claimyr.com). They somehow got me connected to an actual human at the IRS in less than 15 minutes when I'd been trying for days. The IRS agent I spoke with explained that in theft situations involving HSAs, they actually have specific procedures. You can see how it works here: https://youtu.be/_kiP6q8DX5c. I was honestly shocked at how fast I got through - I was expecting another day of frustration. The agent walked me through exactly how to document the theft, which forms to use, and helped me understand how to avoid the penalty given my circumstances. Made a huge difference having a real person explain the process.

I need to apologize for calling Claimyr a scam earlier. After another frustrating morning trying to reach someone at the IRS about my audit notice, I broke down and tried the service. Within 20 minutes I was actually speaking with an IRS representative. The agent confirmed exactly what others have said here about HSA theft reporting - I needed to report the distribution on Form 8889, file Form 4684 for the theft loss, and attach a detailed statement explaining the situation with documentation. She also explained that the 20% additional tax penalty could potentially be waived in cases of theft depending on the circumstances. The representative even put notes in my account about the situation so if there were questions later, there would be a record. Honestly wish I'd known about this service months ago instead of wasting hours on hold.

Definitely file a police report if you haven't already! When my mother had funds stolen from her retirement account, the IRS initially tried to make her pay taxes on it until we provided the police report and court documents. Having the official documentation makes a huge difference. Also, contact your HSA provider immediately. Sometimes they can flag the distributions as fraudulent in their system, which might change how they report it to the IRS on the 1099-SA form. Might be too late for this year, but worth asking.

Just wondering - did the HSA administrator offer any help? When my credit card was stolen, the company reversed the charges and didn't hold me responsible. Is there any kind of fraud protection on HSA accounts?

I'm really sorry you're dealing with this situation - it's incredibly frustrating when you're the victim of theft and still have to navigate all these tax complications. Based on what others have shared here, it sounds like you'll need to take a multi-step approach: report the HSA distribution on Form 8889, file Form 4684 for the theft loss, and include detailed documentation with your return. The key thing seems to be having that police report and court documentation to prove it was actually theft. One thing I'd suggest is keeping meticulous records of all your legal expenses related to recovering this money too - some of those might be deductible as well. And definitely include a clear statement with your return explaining the situation so the IRS understands why you're claiming the theft loss. It's awful that the HSA company isn't being more helpful, but unfortunately that seems pretty common in domestic situations. At least you're taking all the right steps legally. Hang in there - hopefully the court proceedings will resolve in your favor soon.

This is such a complex situation, and I feel for you dealing with theft during what's already a stressful time with legal proceedings. One additional point that might help - if you end up having to pay any taxes this year despite the theft deduction limitations, you may want to consider filing Form 911 (Request for Taxpayer Advocate Service Assistance) with the IRS. The Taxpayer Advocate Service sometimes helps in cases where taxpayers are facing financial hardship due to circumstances beyond their control, like theft. Also, make sure when you file Form 4684 that you use the fair market value of what was stolen (the $2,700) and not try to calculate any depreciation - stolen cash/funds are reported at face value. And definitely keep copies of everything - the police report, court filings, HSA statements showing the unauthorized transactions, and any correspondence with the HSA provider about disputing the charges. The timing is unfortunate since you're filing before the legal case is resolved, but documenting everything properly now will make things much smoother if you need to file amended returns later based on the court outcome. Hang in there!