Well, you can't undo what has been done to the work you've already completed, so you'll just have to make a piece to attach to the top (or the bottom) of it, to make it taller. You could use the same yarn, or a different colored one....just use the same weight yarn and make it the same way you did the bag, the same # of stitches around,etc and felt it...taking it out periodically, to ensure it ends up the same size round as the bag....then sew it to the top (or the bottom) of the bag, and I'd make a 'big deal' out of this process.... you can't make it invisible, so I'd call attention to it...for instance, sew it together with sewing thread, but then top stitch over this, using some sort of fancy embroidery stitch...I'd use a different color for this, too. I'd then use this different color somewhere else on the bag....more embroidery, tassels, buttons sewed on with it, etc...the idea is to make it look, not like an error, but as if it were planned..(that's why I'd make the 'new' piece in a completely different color)!
Good luck.