Many plans approve hardship withdrawals through a self-certification process where you provide a written statement confirming: Your distribution meets the plan requirements and is for one of the approved “immediate and heavy financial needs.”
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).
Lying to get a 401(k) hardship withdrawal can have serious consequences, such as legal repercussions in the form of fraud, financial penalties, and tax implications. If you're caught lying about legibility for a hardship withdrawal, you may face additional fees, fines, and even imprisonment.
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.
The short answer is yes — if you make a 401(k) withdrawal, your employer will know. This is because your employer is responsible for all aspects of offering your 401(k) plan, including hiring the record keeper.
Large changes of income
Probably one of the main IRS audit triggers is a large change of income.
A hardship withdrawal might be denied if your plan doesn't allow withdrawals for that reason. Rules for withdrawals vary from plan to plan.
Yes, it's likely your employer will know about any loan from their own sponsored plan. You may need to go through the human resources (HR) department to request the loan and you'd pay it back through payroll deductions, which they'd also be aware of.
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.
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. You will want to keep documentation or bills proving the hardship, however.
The IRS receives copies of your W-2s and 1099s, and their systems automatically compare this data to the amounts you report on your tax return. A discrepancy, such as a 1099 that isn't reported on your return, could trigger further review. So, if you receive a 1099 that isn't yours, or isn't correct, don't ignore it.
Depending on your situation, you might submit documents such as an unemployment notice, medical bills, military orders or a divorce decree. It's also helpful to provide verification of all sources of income (paystubs, W-2s and 1099s) as well as account statements to show your current financial status.
The IRS permits hardship withdrawals under specific circumstances, such as covering medical expenses, paying tuition for yourself or a family member, preventing eviction or foreclosure, covering funeral costs, or repairing damage to your primary residence.
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.
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.
On an institutional level, your employer has access to these records. This means that every withdrawal from an employee 401(k), including loans and hardship withdrawals, can be known by certain company employees.
No credit reporting: A credit check isn't required when applying given the lack of underwriting, and a 401(k) loan won't appear as debt on your credit report. You also won't damage your credit score if you miss a payment or default on your loan.
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 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.
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.
A 401(k) hardship withdrawal is a penalty-free way to withdraw funds from your 401(k) before age 59½ in the event of "immediate and heavy financial need," as stated by the IRS.
Cash Transactions
Cash is a major audit red flag because it creates all sorts of problems for the IRS. It is almost impossible to track cash transactions, can be easily hidden, does not have a clear electronic record to keep track of it, and is difficult for the IRS to verify.
6 years - If you don't report income that you should have reported, and it's more than 25% of the gross income shown on the return, or it's attributable to foreign financial assets and is more than $5,000, the time to assess tax is 6 years from the date you filed the return.
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.