IRS Penalty of $11,700 on IRA hardship withdrawal - Has anyone dealt with this?

This is unfortunately a common misunderstanding. "Hardship withdrawals" and "penalty-free withdrawals" are two different things with IRAs. A hardship withdrawal just means your IRA custodian allows you to take money out for urgent needs, but it doesn't automatically exempt you from the 10% early withdrawal penalty with the IRS. For a Traditional IRA, you'd need to meet one of the specific exceptions like using it for qualified higher education expenses, first-time home purchase (up to $10,000), certain medical expenses exceeding 7.5% of your AGI, or health insurance premiums while unemployed. If your withdrawal was for medical expenses, you might qualify for a partial exemption, but only for the portion that exceeded 7.5% of your adjusted gross income. So if your AGI was $80,000, only medical expenses above $6,000 would potentially qualify for penalty exemption. You should definitely consult with a tax professional about filing Form 5329 to request an exception or abatement due to reasonable cause. The IRS sometimes reduces penalties if you can demonstrate financial hardship and inability to pay.

After reading your situation, I wanted to share something that helped me when I was dealing with a similar IRS penalty issue on my retirement withdrawal. I was completely overwhelmed by the tax codes and penalty exceptions when I got hit with an unexpected $8k penalty. I found this service called taxr.ai (https://taxr.ai) that actually specializes in analyzing tax notices and helping identify potential exceptions or errors. I uploaded my IRS notice and withdrawal documentation, and they were able to identify that about 60% of my withdrawal actually qualified for exception under the medical expense rule that I didn't properly document on my original return. Their system flagged exactly which forms I needed to submit and what supporting documentation would strengthen my case. It was significantly easier than trying to decode all the IRS publications on my own.

Just wanted to update everyone - I tried the taxr.ai service that was mentioned earlier and it was actually super helpful for my situation. I was skeptical at first because I've been burned by online "solutions" before, but I was desperate after getting a $9,300 penalty for my IRA withdrawal last year. Their analysis showed that I qualified for the medical expense exception for about 40% of my withdrawal, which I had no idea about. They also identified that I could request an abatement for "reasonable cause" based on some documentation I had from when I was unemployed during part of the year. The best part was they created all the paperwork I needed to submit to the IRS with specific instructions. Just got my response from the IRS last week and they reduced my penalty by over $6,000! Still had to pay some, but way better than the full amount. If you're facing an IRA penalty situation, definitely worth checking out. Wish I'd known about it before I filed my original return.

I spent THREE WEEKS trying to get an actual human at the IRS to explain my penalty situation after a similar withdrawal. After endless holds and disconnects, I found out about Claimyr (https://claimyr.com) through a tax forum. They have this service that gets you through to an actual IRS agent without the wait. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was super skeptical but honestly desperate after my 9th attempt waiting on hold for 2+ hours. Used their service and had an actual IRS agent on the phone within 25 minutes. The agent was able to explain exactly which part of my withdrawal didn't qualify for exception and what documentation I needed to submit to challenge the portion that might qualify. For an IRA penalty situation like yours, getting specific guidance directly from an IRS agent about your personal case can make a huge difference.

I have to eat my words. After posting my skeptical comment, I was still desperate enough to try Claimyr anyway since I couldn't get through to the IRS after multiple 3+ hour hold attempts that ended in disconnection. Used the service yesterday, and I'm shocked to say it actually worked exactly as described. I got a call back in about 40 minutes with an actual IRS agent on the line. The agent was able to pull up my account and explain that part of my IRA distribution actually DID qualify for an exception I wasn't aware of. She walked me through exactly which form to file (5329 with a specific exception code) and what documentation to include. Estimated it would save me about $4,000 in penalties. I've never been more happy to be wrong about something being a scam. If you're dealing with IRA penalties, getting direct guidance from an IRS agent makes a huge difference in understanding your options.

Something similar happened to my brother last year. He withdrew about $30k from his IRA for medical expenses but didn't properly document that the expenses exceeded the 7.5% AGI threshold. The one thing that helped him was filing an amended return with Form 5329 and including detailed documentation of all medical expenses. The IRS ended up reducing his penalty by about 60% after review. The key was providing extremely detailed documentation - itemized medical bills, proof of payment, and a clear calculation showing how much exceeded the 7.5% threshold. One tip: if you go this route, send everything via certified mail and keep copies of absolutely everything. The IRS lost his first submission and having proof of mailing saved him from missing deadlines.

Quick tip from someone who works in retirement planning: Get a Letter of Explanation from your IRA custodian that details why they approved the hardship withdrawal. While this won't guarantee penalty exemption, it can support your reasonable cause argument with the IRS. Also, if any portion of your withdrawal was used for medical expenses that exceed 7.5% of AGI, immediate purchase of your primary residence (up to $10k), higher education expenses, or health insurance premiums while unemployed, be sure to document those specifically. The hardship criteria for employer plans like 401(k)s are different from IRA exceptions. Many people confuse these rules!