In order to finance my child's college education I took a loan on my 401K of 60K. During the next calendar year, I lost my job and the distribution was considered income for my 2006 taxes. I incurred both penalties and taxes which totalled 18K. Since my income places me in a bracket where college financial aide was extremely limited, is there any hope of reducing this tax liability? I was unemployed all of 2006 and most of 2007 and as such did not have the funds to pay. I currently am in negotiations with the IRS through the offer in compromise. I have been denied with a statement that I owe the money. What can I do?

Thank you in advance

Negotiate a payment plan. There is nothing else you can do. The law is clear, you incurred a distribution prior to retirement age and that means taxes and penalties.

Agreed; the payment plan is probably the best option.

If you had used an enrolled agent to file your offer in compromise to begin with, it probably would have stood a better chance of acceptance by the IRS.

However, the matter has been decided, and appeals normally are pointless. Hiring an enrolled agent at this point would probably be a waste of money.