2022 and earlier tax prepared using turbotax Home & business products. The software incorrectly calculates the value on form 8889 (HSA's) line 13. Can this be corrected?

[ttdanwann1]

Line 13 instruction states " HSA deduction. Enter the smaller of line 2 or line 12 here and on Schedule 1 (Form 1040), PartII, line 13". 
Line 2 is $0 and line 12 has a positive value. Turbotax failed to enter $0 rather put in the value found in line 12. This error was caught by IRS and denied the turbotax value of this Line 13 entry stating that it must be $0. This error affects future and past taxes. What is the answer to this issue?

[BillM223]

"This error was caught by IRS " Are you saying that the IRS sent you a letter? Please let us know how the IRS caught and denied this.

Line 13 was correctly calculated - the issue is that because the IRS never specified how to handle the HSA contribution carryover from a previous year, TurboTax added it invisibly to Line 2 so that the carryover could be treated as a personal contribution, and potentially used up in the subsequent year.

Of course, if you had no real, current year contributions, then Line 2 would be only the carryover, which for most taxpayers, would be zero or blank. This is what you are seeing for years 2022 and before.

About three weeks ago, the IRS changed a check on the 8889 on the e-file process, and started rejecting returns that they had accepted for years. So TurboTax made a quick change to print the real value of Line 2.

But now you are suggesting that the IRS is going back in time to reject returns that were previously accepted - so it is very important to us to know what the IRA told you.

[ttdanwann1]

Yes, the IRS sent me a letter "CP11" stating that they found an error on 2022 Form 1040SR line 11 Adjusted gross income was in error. They did not go back to previous years to challenge my taxes. This only affects the 2022 tax . My concern here is that past years tax forms if in error then then my 2023 reporting could carry the same error forward.

I made multiple calls to the IRS resulting in no information on what and where was the error and which and what Form it came from. After 4 calls I was able to get a side by side transcript of what I had on my TurboTax forms and what the IRS determined was correct. From this I found the source of the difference which was on form 8889 "HSA" line 13. TurboTax put a value in this line and the IRS had a correction of zero.

Line 13 instruction states
" HSA deduction. Enter the smaller of line 2 or line 12 here and on Schedule 1 (Form 1040), PartII, line 13".

Line 2 which states
"2 HSA contributions you made for 2022 (or those made on your behalf), including those made by the unextended due date of your tax return that were for 2022. Do not include employer contributions, contributions through a cafeteria plan, or rollovers"

On my return line 2 was zero and 12 had a value which was entered into line 13 by TurboTax . The calculation for line 13 takes the smaller value from either line 2 =$0 or line 8 ( line 3, maximum allowable contribution , plus line 7, the HDHP value, minus line 9, employer contributions in your HSA for 2022). I will have great difficulty convincing the IRS that with your instructions that the value in line 8 should be entered onto line 13 not line 2 which you state should be the contribution carryover from a previous year is to be reported for which I may have a carry over dollar amount in my HSA. To the best of my understanding the line 2 wording does not include a carry over values from previous years taxes. How does TT make the interpretation that you are taking?

Finally, if I enter a value into line 2 greater than $0 TurboTax still takes the line 12 value every time. So, if TurboTax made a quick change to print the real value of Line 2 and I have kept my revision of the software up to date then why does form 8889 line 2 not show a value in and a value in line 13?

Thank you for your help;

[BillM223]

Let me explain how your 8889 came to be this way.

You had an HSA excess contribution carryover from 2021 to 2022.

The IRS does not provide any instructions for how to handle excess contribution carryovers on the 8889 (go look for yourself - it isn't there).

Yet, the carryover has to be on the 8889 so that the current year HSA deduction can be correctly calculated.

The Instructions for form 8889 (page 😎 are as follows:

Deducting an Excess Contribution in a Later Year 

You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contributions you can deduct in the current year is the lesser of the following two amounts. 

• Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year. 

• The total excess contributions in your HSA at the beginning of the year

You will notice that there is no reference as to what lines these bullet points should be placed on. The excess contributions to be deducted should appear on Line 13 (8889) so that it can appear on Schedule 1 (Form 1040), Part II, line 13 (See form 8889).

You noticed that the instructions for Line 2 (8889) do not specify that the carryover should appear here:

Include on line 2 only those amounts you, or others on your behalf, contributed to your HSA for 2023. Also, include amounts contributed for 2023 made in 2024 by the unextended deadline for filing your 2023 federal income tax return, April 15, 2024....

Do not include employer contributions (see line 9) or amounts rolled over from another HSA or Archer MSA. See Rollovers, earlier. Also, do not include any qualified HSA funding distributions...

Note that a "carryover" is not the same as a "rollover".

Lacking any IRS instructions, at some point in the past, TurboTax made the decision to place the carryover amount on Line 2, but "invisibly". The good news is that this causes the correct calculation for Line 13. The bad news is that on its fact, Line 13 sometimes appears to be incorrectly calculated.

This happens in this case.

Let's suppose that your carryover is $2000, and Line 12 (primarily the "employer" contributions) amount is $1200. Line 13 should be the "the smaller of line 2 or line 12". Under the covers, Line 2 is $2000 and Line 12 is $1,200, so Line 13 is set to $1,200.

Unfortunately, since the carryover is "invisibly" placed on Line 2, so a 0 (zero) appears on Line 2. This means that the calculation for Line 13 appears to be wrong, because 0 (line 2) is smaller than $1,200 (Line 12), yet Line 13 is set to $1,200.

Therefore, Line 13 is correct even though it does not appear to be.

TurboTax has done this for many years, and to my knowledge never had a complaint from the IRS.

However, in early February 2024, the IRS added a math check to the e-file process. It compared Lines 2, 12, and 13. and if Line 13 did not appear to be the smaller of Lines 2 and 12, the return was rejected.

In order to avoid the rejects, TurboTax started visibly adding the carryover to Line 2, so in our example, Line 2 was 2,000, Line 12 was 1,200, so Line 13 was still the same correct value of 1,200. The returns were now accepted since they passed the math test on the 8889 on e-file.

The good news is that this return would e-file. The bad news is that the 8889 did not follow the IRS instructions for the 8889.

I am explaining this so that you can use this to explain why what happened actually happened.

You have three things to choose from.

1. Reply to the CP11. Yes, I understand you doubt that the IRS will accept this explanation. However, even though IRS agents that you talked to did not understand the situation, the IRS office responsible for the CP11s and their responses at least have the time and opportunity to review the situation.

2. File a claim with the TurboTax Tax Accuracy group.

3. Ask the TurboTax Audit Support Center for assistance. They may help you compose the letter to the IRS in response to the CP11.