Would filing an amended return for 2023 be easier than trying to explain the situation on my 2024 return? I'm worried about triggering an audit if things don't match up properly.

Filing an amended return would create a cleaner paper trail, but it's probably more work than necessary in your situation. Since you already withdrew the excess before the deadline and didn't take a deduction for the excess amount on your 2023 return, the main issue is just documenting the nature of the distribution on your 2024 return. Attaching an explanation statement to your 2024 return is likely sufficient and much simpler than amending your 2023 return. The risk of audit is actually quite low for this situation. The IRS is primarily concerned that you didn't deduct more than you were entitled to (which you didn't) and that you properly report distributions (which you will with the explanation). This type of corrective action happens frequently with HSAs and isn't a red flag as long as you document it properly.

The excess contribution rules are the same whether you're self-employed or not. What matters is your HDHP coverage. Since your coverage didn't start until February, you'd need to prorate your contribution limit. For 2024, if you have individual coverage, you'd be limited to 11/12 of the $4150 limit, which is about $3804. So your $3900 would include about $96 in excess contributions that you should withdraw before the filing deadline.

Thanks for bringing this up - I hadn't even considered redemption timing issues. Is there any exception if the redemption is very small compared to the total outstanding shares? For example, if they bought back 2% of shares from a departing employee?

There is a de minimis exception for redemptions, but it's very limited. The exception only applies if the total value of stock redeemed within the relevant period doesn't exceed $10,000 OR 2% of the value of all outstanding stock at the beginning of the period. So for most businesses of meaningful size, that 2% threshold is really tiny. The safest approach is to ensure no redemptions have occurred in the look-back period. If there have been redemptions, you'll need to carefully analyze whether they fall within the de minimis exception or whether there's a qualifying exception for death, disability, or divorce (there are specific carve-outs for these situations).

Yes, this is a real concern! One way around this is to establish a separate entity for your excess cash/investments. The "active business" test requires that at least 80% of assets be used in the active conduct of a qualified business. If your cash reserves are getting too large, you could dividend out excess cash to yourself and then invest personally, or create a separate investment entity that wouldn't affect your QSBS-eligible company.

This finally makes sense! So basically I can't get both benefits on the same dollars - either the money is tax-free OR I can use it for LLC but not both. Would it be possible to split my qualified expenses? Like use $8,000 for tax-free fellowship treatment and the remaining $5,500 for the LLC calculation?

Exactly! You can absolutely split your qualified expenses to optimize your tax situation. You could allocate $8,000 of your qualified expenses to make that portion of your fellowship tax-free, and then use the remaining $5,500 toward calculating your Lifetime Learning Credit. With the LLC giving you a credit of 20% of your qualified expenses, that $5,500 would generate a $1,100 tax credit. You'd need to calculate whether this approach saves you more than making all $13,500 of your fellowship tax-free. It depends on your tax bracket, but credits are generally more valuable than exclusions from income.

I used TaxSlayer last year with a research fellowship and Lifetime Learning Credit. It worked fine but you have to be careful about how you enter the fellowship income. If you received a W-2, enter it as wages. If no W-2, you need to report it as "Other Income" and then separately indicate how much was for qualified expenses. For the LLC, make sure you're only claiming expenses that weren't already covered by tax-free scholarship/fellowship funds. TaxSlayer has a decent education credits section but doesn't always make this distinction super clear.

Thanks for the advice! I didn't itemize - I took the standard deduction. Would that have made a difference with how the gambling income was handled? I'm definitely saving everything from TurboTax, including recording our phone conversations (with their knowledge).

Yes, that makes a significant difference. Gambling losses can only be deducted if you itemize deductions, and even then, they're limited to the amount of your gambling winnings. Since you took the standard deduction, you couldn't deduct those losses at all, which means your AGI should definitely have included all the gambling winnings. This actually makes TurboTax's error even more clear-cut. They should have included all gambling winnings in your AGI calculation regardless of your losses or deduction choice. Definitely consult with a tax attorney - this is a textbook case of preparer error.

Did H&R Block end up covering any of your penalties or offering any compensation for their mistake? I'm dealing with something similar right now.

Banks are required by law to keep those records! Ask to speak to a supervisor in their tax document department, not just a regular customer service rep. If they still refuse, remind them that per IRS regulations they MUST provide you with copies of tax documents for at least 3 years. If all else fails, you can try filing Form 4506-T with the IRS to get wage and income transcripts that might show the IRA contributions even if you don't have the bank's forms. I had to do this when my credit union "lost" my 5498 records during a system update.

Thanks for this advice! I called again today and specifically asked for the tax document department instead of regular customer service. They still gave me trouble but when I mentioned the IRS regulations about maintaining records, their tone changed completely. They're sending me copies of all my 5498 forms from the last 4 years. I had no idea about Form 4506-T either, that's super helpful as a backup option. I'm starting to feel like we need a complete guide for dealing with banks that "lose" or mess up IRA contribution records!

This is really important info, thank you! Our letter arrived yesterday, so I'm guessing our 90-day clock is already ticking. Should we hire a tax attorney to help with the Tax Court petition if we can't get this resolved quickly? I'm worried about messing up the paperwork and losing our right to challenge this.