You do not have to prove hardship to take a withdrawal from your 401(k). That is, you are not required to provide your employer with documentation attesting to your hardship.
IRS doesn't audit individuals for 401(k) hardship withdrawals, AS LONG AS the employer sponsor of the plan and it's administrator (your employer and Fidelity) have approved it. The entity that will be audited is the plan/sponsor/ administrator.
Unless the employer's 401(k) plan is audited and the agent makes a request to verify hardships met the rules, the answer is No the IRS does not care. However, if the employer finds out they lied to get the hardship their employer could take steps to get the money back so they can maintain their qualified status.
Eligible “safe harbor” hardship types are: Medical expenses for you, your spouse or dependents; Purchase of a principal residence (the residence that is listed as the principal residence on your Form 1040); Tuition and related expenses for the next 12 months for you, your spouse or dependents.
Self-certification is available only for the “safe harbor” reasons for a hardship withdrawal, which include: Medical expenses. Purchase of a principal residence. Expenses to prevent eviction from, or foreclosure on, a principal residence.
Acceptable Documentation
Lost Employment. • Unemployment Compensation Statement. (Note: this satisfies the proof of income requirement as well.) • Termination/Furlough letter from Employer. • Pay stub from previous employer with.
The 401(k) hardship withdrawal process
If your employer doesn't deem your hardship as immediate or necessary, your request can also be turned down, O'Shea says. The entire process may take a few weeks, she adds.
As you'd expect, the higher your income, the more likely you will get attention from the IRS as the IRS typically targets people making $500,000 or more at higher-than-average rates.
To prove your tax hardship to the IRS, you will need to submit information about your financial situation to the federal government in a hardship request. This is done using Form 433A/433F (for individuals or self-employed) or Form 433B (for qualifying corporations or partnerships).
The consequences of false hardship withdrawal can range from fines and penalties to tax implications or even jail time. Additionally, lying to an employer can severely hinder your career growth or result in job loss. In other words, if you don't qualify, seek an alternative solution.
You must pay income tax on any previously untaxed money you receive as a hardship distribution. You may also have to pay an additional 10% tax, unless you're age 59½ or older or qualify for another exception. You may not be able to contribute to your account for six months after you receive the hardship distribution.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
The short answer is yes — if you make a 401(k) withdrawal, your employer will know.
The IRS may agree that you have a financial hardship (economic hardship) if you can show that you cannot pay or can barely pay your basic living expenses. For the IRS to determine you are in a hardship situation, the IRS will use its collection financial standards to determine allowable basic living expenses.
Another easily avoidable audit red flag is rounding or estimating dollar amounts on your tax return. Say, for instance, you round $403 of tip income to $400, $847 of student loan interest to $850, and $97 of medical expenses to $100. The IRS is going to see all those nice round numbers and think you're making them up.
For the 2022 tax year, the gross income threshold for filing taxes varies depending on your age, filing status, and dependents. Generally, the threshold ranges between $12,550 and $28,500. If your income falls below these amounts, you may not be required to file a tax return.
Turnover limit for applicability of tax audits to businesses is Rs. 1 crore. However, the limit should be increased to Rs. 10 crores if the cash receipts / cash payments does not exceed 5% of the total receipts / total payments.
What Proof Do You Need for a Hardship Withdrawal? You must provide adequate documentation as proof of your hardship withdrawal. 2 Depending on the circumstance, this can include invoices from a funeral home or university, insurance or hospital bills, bank statements, and escrow payments.
The IRS defines financial hardship as “unable to pay his or her reasonable basic living expenses.” If you owe more than $10,000, you will need to fill out a form detailing your assets, debts, income, and living expenses. If you are sick or disabled, you will need proof from healthcare providers or caseworkers.
Using the loan to pay off credit card debt may not meet the hardship criteria set by some plan administrators, as hardship withdrawals are generally restricted to specific circumstances defined by the IRS, including: Medical expenses. Costs related to purchasing a primary residence. Tuition and educational fees.
You will not need to submit any documentation with your application to prove that you meet all of the qualifications to take a hardship withdrawal. As part of the application, you will certify that you meet all of the requirements to receive a hardship withdrawal.
IRS Hardship Refund Request – Form 8944
The request should include detailed documentation supporting the financial hardship faced by the taxpayer, including proof of income, expenses, debts, and any other relevant financial information.