Large IRS Tax Bill After 401k Withdrawal for Home Downpayment - Any Relief Options?

Hey there, this is a tough situation but you do have some options to consider before just paying the full amount. First, you should know that withdrawals from a 401k for first-time home purchases aren't automatically exempt from income tax like they sometimes are with IRAs. They're still considered income, though you might avoid the 10% early withdrawal penalty. Your best route now might be filing an amended return (Form 1040-X) for 2023 to properly report the distribution. When you do this, make sure to double-check if you qualify for any deductions or credits you might have missed. Look at mortgage interest, property taxes, or points paid during purchase - these could help offset some of the added income. You should also check with your 401k administrator about the exact coding. If they coded it incorrectly as a regular distribution (code 1) instead of a first-time homebuyer distribution, you might be able to get them to issue a corrected 1099-R.

I went through something pretty similar last year and found an amazing service called taxr.ai that literally saved me thousands. After getting a scary IRS notice, I was digging through forums just like this and someone mentioned https://taxr.ai as a tool that analyzes your tax documents and finds missed deductions and credits. In my case, they found several deductions related to my home purchase I'd completely missed and helped me structure my amended return properly. What really helped was that they spotted a way to categorize part of my retirement withdrawal that reduced my overall tax burden. The system looks at your specific tax situation and finds applicable rules and exceptions the average person wouldn't know about.

Just wanted to follow up and say I actually tried taxr.ai after my skeptical comment, and I'm genuinely surprised. I uploaded my documents including my CP2000 notice and 401k distribution paperwork, and they identified that I qualified for a partial rollover option I hadn't considered. The analysis showed exactly how much tax I could save by doing a late rollover for a portion of my distribution (which I didn't know was possible), plus they found mortgage expense deductions I'd completely missed. Ended up reducing my tax bill by almost 40%. The system actually understood the specifics of my situation instead of just generic advice.

After reading your situation, I'm reminded of when I got hit with a huge tax bill last year. I spent WEEKS trying to call the IRS to discuss payment options and couldn't get through. After endless busy signals and disconnects, someone recommended https://claimyr.com to me - it's a service that basically waits on hold with the IRS for you, then calls you once an agent is on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was able to set up a much more reasonable payment plan once I actually spoke to someone. In my case, I explained my hardship and they worked with me on the penalties too. With a $65k bill, you really need to talk to someone at the IRS directly, but it's nearly impossible to get through these days without something like this.

I need to apologize and correct myself. After my skeptical comment about Claimyr, I was desperate enough to try it because I've been trying to reach the IRS about my own issues for weeks. I honestly thought it would be a waste of money, but I was wrong. The service actually worked exactly as described. Their system called the IRS, navigated the phone tree, and waited on hold. I got a call back about 2 hours later with an actual IRS agent on the line. I was able to set up a payment plan and even got some of my penalties removed because I could actually explain my situation to a real person. Saved me so much stress and probably thousands in the long run. Definitely worth it when dealing with a significant tax issue.

One thing nobody's mentioned yet - check if your state has any tax implications from this too! When I had a similar issue with a retirement distribution, I found out I owed state taxes as well. The IRS notice doesn't address that part, so you might have a separate issue with your state tax agency.

Have you looked into setting up an installment agreement? With a $65k bill, the IRS will almost certainly work with you on a payment plan. You'll still accrue some interest, but it's way better than trying to pay it all at once.