I received a letter from the IRS stating that I withdrew money out of my HSA in 2014. I NEVER did, but I used every penny for medical expenses. What do I do?

[jnkbryan2005]

I have printed out details of the entire year of all contributions and all withdrawals (medical expenses) that were made.  Now what do I do? Is this good enough?

[SweetieJean]

Did you record those medical expenses your 2014 return?

[dmertz · Accepted solution]

Although your medical expenses may have been paid directly from your HSA, say, by using a debit card associated with the HSA account, these are still distributions from the account that must be reported on your tax return so that you can explicitly indicate the amount that was used for medical expenses.  By not entering the 2014 Form 1099-SA reporting the distribution, the IRS has no way of knowing whether or not the money went to medical expenses.  Entering a Form 1099-SA results in TurboTax preparing Form 8889 Part II to calculate the amount of the distribution subject to tax and penalty.  If you did not enter this Form 1099-SA and your tax return did not include a completed Form 8889 Part II, the IRS assumes that the entire amount was taxable and potentially subject to an early-distribution penalty.

It's possible that all the IRS needs is the completed Form 8889 Part II.  However, if the IRS is questioning the accuracy of the amount shown (or will be shown) on Form 8889 line 15, you may need to provide supporting documentation for the medical expenses that were paid.  The notice that the IRS sent you should detail how they expect you to respond.

[Opus 17]

Taking out money IS a withdrawal, even if you spent it on medical expenses.  You need to answer the questions in Turbotax to tell that to the IRS, or else they will assume you spent the money on other things and owe taxes.  You may need to amend your 2014 return.

[taxing61]

Form 8889, Part II, line 15, specifically asks for the amount of Qualified Medical Expenses paid using HSA distributions.  If your total distributions are greater than the medical expenses plus excess contributions withdrawn before the tax filing deadline, you owe tax and a penalty on that amount, assumed to be withdrawals for non-medical expenses.