Owed taxes for discounted health care after pension cash out

She is 'stuck', sorry.

Aside: this is not actually a discount. Technically it is an advance payment, to the insurance company for your benefit, of (edit) an estimate of the (refundable) Premium Tax Credit (PTC), called Advance PTC (APTC), based on your projected income (more exactly household MAGI, see Are long-term capital gains considered for ACA subsidy calculation, even if they are taxed with 0%?). IMLE the 'exchange' website(s) obfuscate this by calling it 'financial assistance', and conflating it with the (separate and quite different) 'Cost Sharing Reduction' that only applies up to 250%FPL. ISTR one time by drilling down enough I found a page that described it accurately, but it took like half an hour and I already knew what I was looking for, having read the IRS publications.

But yes, if a person's income (by the definition referenced) is over 400%FPL they are ineligible for PTC, and if it was already paid (as APTC) they must pay it back. (At lower levels, if e.g. one projects income at 200%FPL and receives the corresponding APTC but actual income is 300%FPL, one qualifies for some PTC but less than the amount paid and must pay back at least part of the difference -- for incomes up to 400%FPL there are statutory caps on the amount of the repayment and some of it may be forgiven, but over 400% the difference is the whole amount and there is no cap on repayment.)

This shouldn't have needed an 'audit'. (IRS actually has several different error correction medthods and programs, and this probably wasn't the one people normally call audit, but that doesn't matter.) Mom should have received a copy of form 1095-A from the exchange in January that said clearly "if you received [APTC] you must file a tax return [and] complete and file form 8962". The 1040 instructions, and pub 17, also repeat several times that if you received APTC you must file 8962 to 'reconcile' it with your actual PTC if any, or if she used software it should have prompted for this case and automatically included 8962. In either case 8962 should have shown the required repayment, carried to schedule 2 and then 1040 line 12b as additional tax due. (I coincidentally had the same situation, except due to capital gains I realized unexpectedly in Oct. rather than pension income, and that's exactly what my return showed, using commercial software.)

If paying this unplanned-for amount is difficult for Mom -- which wouldn't surprise me if she has income near 400%FPL and debt -- there are some options at https://www.irs.gov/payments . In particular, since this is (far!) under $50k, she can automatically get an installment agreeement to pay small amounts monthly over a period potentially up to 7 years (since this is soon after assessment and ASED is not an issue). They'll charge half the normal penalty, which is effectively 3% a year, plus interest of another 3% plus a short-term Treasury market rate, which is currently near zero and nearly certain to remain there for several years at least; the total of about 6% is cheaper than most unsecured debt and even some secured debt most people can get elsewhere, though by all means check for other possibilities. Good luck.