Traders Accounting - Tax Resource for Traders

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Tuesday, August 11, 2009

The IRS Service can seize funds in a health savings account for unpaid taxes.

In a private ruling, the agency says that even though HAS funds are held in a trust, the broad powers granted IRS to grab assets for tax debts allow it to tap the account.

Worse, there is a double whammy if IRS taps the account: Payouts are taxed as income to the owner of the HAS. And there’s a 10% penalty on the distribution unless the HAS owner is age 65 or older or is disabled when the Service takes the money.

The rule is different for seizures from IRAs and 402(k)s. There, no penalty is owed, even if the employee is under the age of 591/2. Congress specifically barred any penalty in those cases, figuring that punishing an involuntary payout adds insult to injury. Unfortunately, there’s no such expectation for involuntary withdrawals from HSAs.