Childcare Flexible Account
I have a friend who just found out that kindergarten is not an eligible expense.
The problem is he has been putting money into his FSA account all year and it's almost at $5k now. He has been submitting claims all year and found out that they were all incorrect as his child is in kindergarten. They told him that for him to correct this they would have to correct all of the claims and he would have to pay back the money that the claims paid out. And it would go back into his FSA account, but he would not get this money back as it would go to his employer. So he would basically have to pay back about $3k and never get it back. He doesn't have $3k.
This is for 2013 so he hasn't filed his taxes yet. Does he have any other choice to correct this? Could he just file his taxes as if he never knew that kindergarten expenses weren't included? And if he was audited the worse case scenario is his taxable income would increase by $5k. So he would have $5k that he would have pay taxes on, and I can't see that ending up in $3k out of his pocket.
This all is terrible because he honestly didn't know any better. Any advice would really be helpful.