I think it goes like this. I get a huge medical bill - say, $50,000. What can I do to pay it? What assets do I have? Well, I've got $1,000 in the checking account. That isn't going to cut it. Ah, but I've got $60,000 in my IRA, and the rules say I can tap it in this situation (IIRC). Well, goodbye retirement, but at least I can pay off my medical bill now.
Unfortunately, that $50,000 I took from the IRA counts as income, so my income this year is $50,000 higher than my withholding. Behold, a rather large unexpected tax bill. Nothing shady required.
If my memory is wrong, if you can't take it out of an IRA for emergency medical expenses, then replace "IRA" with "stock I bought two decades ago for much less than it's currently worth". Same result.
Unfortunately, that $50,000 I took from the IRA counts as income, so my income this year is $50,000 higher than my withholding. Behold, a rather large unexpected tax bill. Nothing shady required.
If my memory is wrong, if you can't take it out of an IRA for emergency medical expenses, then replace "IRA" with "stock I bought two decades ago for much less than it's currently worth". Same result.