Did the CPA actually request a private letter ruling? If the ruling was denied what was the ruling number that was issued?
Were the funds put back into an IRA? If so, how many days after the distribution was the rollover made?
In the year that the funds were withdrawn did you or your husband pay for any higher educational expenses or incur significant medical expenses?
Does your husband's company have an extension for filing the business tax return? If so, when does the extension end? Is your husband's business incorporated? Did the business have a profit for 2008? Did your husband receive a W-2 from his business or was he a sole proprietor? Were there any other employees?
He requested one. Then he had conversations with the IRS in DC and they told him that they were inclined to deny it. They then suggested to him that he'd be better off withdrawing it then having a public record of them denying it.
The funds are in a money market. We were told by our financial guy (not the CPA that's been working on this) that because we were over the 60 days that we couldn't put them back in the IRA. So we put them in a money market to avoid any further penalties.
In 2008 when we took the money out we had the medical expenses of having our child.
We are fairly certain the business tax return has been filed for 2008. They are incorporated. The company did not have a profit in 2008. He did get a W-2 (it's a partnership). There were other employees 2008.
Because you were under age 59 1/2, there is an additional 10% penalty tax on the distribution. So if the expected taxes of $23,000 that you will owe include the 10% penalty tax then you may be able to reduce the penalty amount if certain exceptions apply. One exception that may be available is for payment of unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). So for example, if your medical expenses (including medical insurance premiums that you paid on an after-tax basis) were $20,000 and your AGI was $100,000 then for the expenses in the amount of $12,500 [$20,000 - $7,500 (7.5% of $100,000)] you would be able to avoid the penalty tax on $12,500 of the distribution.
Your answers to my other questions rule out any alternatives that I was going to suggest.
See pages 53 - 54 - http://www.irs.gov/pub/irs-pdf/p590.pdf
Enrolled Agent
EA, QPA, CHFC, CEBS, CLU - 29 years experience providing financial advice