How can I report taking 401K early to pay IRS debt that should not be penalized?

[SusanY1]

If the proceeds were used to pay an IRS levy, you can exclude up to $10,000 from the penalty.  In TurboTax, this is indicated in the follow-up screens that come after you enter the income into the program.  There are quite a number of questions that will follow the entries, and you are looking for the one that will read Did you use your IRA to pay for any of these expense?  It should look similar to this:

[DoninGA]

A levy is a legal action by the IRS. 

Just having taxes owed does not constitute a levy by the IRS unless other actions have occurred.

Go to this IRS website for information -  https://www.irs.gov/businesses/small-businesses-self-employed/what-is-a-levy

What actions must the Internal Revenue Service take before a levy can be issued?

The IRS will usually levy only after these three requirements are met:

• The IRS assessed the tax and sent you a Notice and Demand for Payment (a tax bill);
• You neglected or refused to pay the tax; and
• The IRS sent you a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (levy notice) at least 30 days before the levy. The IRS may give you this notice in person, leave it at your home or your usual place of business, or send it to your last known address by certified or registered mail, return receipt requested. Please note: if the IRS levies your state tax refund, you may receive a Notice of Levy on Your State Tax Refund, Notice of Your Right to Hearing after the levy.

[dmertz]

If you took the distribution yourself, it's not a levy and the IRS-levy exception to the early-distribution penalty does not apply.