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In the 2009 tax year we had big medical bills as my wife had a heart attack and had to have stents inserted. I took an early 401k distribution to pay the medical bills. A few weeks ago I got a CP2000 notice requesting payment of a 10% tax penalty, although I'm pretty sure this particular distribution was exempt since it was used to pay medical debts. Should I challenge the notice? If so, what evidence should I send?

You should pay the penalty. Early distributions from IRAs can avoid the 10% excise tax if they meet certain conditions (medical expenses in excess of 7.5% of AGI is one), but the exemptions do not apply to early distributions from 401(k) accounts.

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