I borrowed money from my 401k to purchase my primary residence (88,000.00 to be exact) Now I got a letter stating that I owe the IRS 28,000.00 in taxes. I asked the 401k advisor at my job, before borrowing, if I would be taxed. He said no. He said because I was using money to purchase primary home I would not. What do I do? The IRS wants more money than I have to give. Of course it is my word against the company. When I called to get the gentleman's name they said they have no idea.

Sorry but you were given bad information. You obviously didn't "borrow" the money, you withdrew it. When you take an inservice withdrawal from a 401K, the amount of the distribution is added to your taxable income. Did you ignore the 1099R they sent you? I don't know if the $28K includes the 10% penality or not. But purchase of a residence does not qualify for a hardship withdrawal from a 401K. So it may be included.

And even if you can prove that you were given bad advice, that doesn't absolve you owing the money.

But you should have $80K in equity on the house. Try taking a home equity loan.

I gave all the paperwork to my tax accountant. I don't have that kind of equity in the house because after we moved in we had a bad flood in the basement. I had to replace all the downstairs floors. So I had to take a home equity loan and then they re financed and now I owe almost as much as I put into the house.

If you had your return prepared by a tax specialist, and you gave him the 1099R your plan sent you, then he screwed up. But generally such specialists can only be held responsible for any penalties as a result of their mistake, not the actual tax liability.

I would suggest trying to work out a settlement or payment plan with the IRS.

This is from a FAQ at the IRS site:
"If you are under the age of 59 1/2, you cannot withdraw funds from your 401(k) plan to purchase your first home without being subject to a 10 percent additional tax on early distributions from qualified retirement plans. However, depending on the rules for your 401(k) plan, you may be able to borrow money from your 401(k) plan to purchase your first home. Your plan administrator should have written information about your particular plan that explains when you can borrow funds from your 401(k) plan as well as other plan rules."

All advice given is sound. I have nothing to add.

Unfortunately, you DO owe the taxes.

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Originally Posted by AtlantaTaxExpert

All advice given is sound. I have nothing to add.

Unfortunately, you DO owe the taxes.

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I moved this to the Tax forum to make sure my advice was correct on what the tax preparer would be responsible for. Can you imagine a competent Tax Preparer ignoring a 1099R?

No, I cannot.

Unfortunately, there are more than a few INCOMPETENT tax preparers out there.

The question is whether an incompetent preparer can be held liable for their incompetence and to what extent?

He can sue and possibly recover whatever penalties and interest he had to pay, but NOT the taxes owed themselves. But that is a real hard case to make, as even the IRS holds the taxpayer responsible for the contents of the return.

If there is real malfeasance, the IRS can in place a whole host of fines and penalties that can be assessed on the tax professional.

However, enforcement of these fines and penalties are, In my opinion, not a high priority with the IRS.