I paid for medical expenses using my FSA debit card back in January 2009. All charges were approved. The charges and bills occured in November 2008. A few month later my FSA provider sent a letter saying I used my card incorrectly and I can either pay back $2,341 or my employer and the IRS will be notified of my incorrect charges. They also suspended my account. How does these charges affect my W-2? Will they make me pay it back or do I only have to pay taxes on it? How does this process work? My FSA can't seem to get me an answer for that.
If you used 2009 money to pay for 2008 incurred expenses, that was illegal. What will happen, is that the 2009 money will be added to your taxable income, unless you pay it back, or submit 2009 expenses.
You probably need to talk to a tax attorney.
You have a problem.
You used 2009 FSA money for a 2008 expense. The expenses have to be in the same plan year and the money withheld. After an audit, they realized this is for a prior year expense.
You got the letter. You owe them $2341. So pay it. Once you pay it back, you are in sync. You will be considered to have paid the $2341. (If you itemize and if the total is more than 7.5% of your AGI, you could possibly itemize it on your 2009 tax return.)
If you don't pay it back, the money is additional income to you. Your employer won't be happy with your giving yourself a $2341 raise so I would expect you to get fired over this.
The employer can sue you for the money.