[Alberta's Child]

What I would do is NOT roll it over; I'd put it into real estate or stocks or bank accounts of under 10k. I wouldn't report it on my tax return, reasoning that my former employer would report my having cashed it out, so I wouldn't need to report it. If the IRS eventually came after me for the penalty or income tax on it, I'd go to a lawyer and then make a payment plan with the IRS. However, I have heard the IRS often doesn't track the cashed-out 401Ks.

Let me assure you that 401(k) redemptions are one of the easiest things for the IRS to track. When you cash out your 401(k), the administrator of your 401(k) account will file a form with the IRS that reports the exact amount you have cashed out. If you roll it into an IRA it is reported as a tax-exempt rollover on one type of form (a 1099-R, I believe). If you take the money out completely, it is reported as a 401(k) distribution on a different form.

The forms that the administrator files with the IRS have your Social Security number on them, so cross-checking between your tax return and the 401(k) distribution form your plan administrator files is so easy that the IRS uses a computer program to do it.

[Engedi]

This is true. I find it ironic how the IRS tracks this and knows every withdrawal however, they can’t seem to have a computer system that sends up a red flag when 1,000 tax refunds are sent to the same address, like here in Michigan few years ago.