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IRS faces uphill battle policing Health Savings Accounts.(HSAs)(Internal Revenue Service)(Brief Article)
Kiplinger Tax Letter, The, June, 2004
IRS faces an uphill battle policing Health Savings Accounts.
The problem involves checking how HSA funds are used by payees. Distributions from HSAs are not taxable if used to pay medical expenses. Withdrawals for other purposes are taxed and are subject to a 10% penalty unless made on or after reaching age 65 or because of death or disability.
There's no system to verify the specific use of HSA payouts. Although HSA custodians will report withdrawals to the payee and the IRS, it's up to HSA owners to explain on their returns how the funds were used. On the other hand, payouts from flexible spending accounts for medicals must first be approved by the administrator, an independent third party.
The IRS' only weapon is to do more examinations...
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