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Section 1035 & Incorrect 1099-R

Hi all.

In 2009, I transferred the cash value from one insurance policy into another using a section 1035 exchange. The old policy had no outstanding loan balance and no one disputes that it was a 100% tax- deferred 1035 exchange.

As anticipated, the outgoing insurance company sent a 1099-R. Pursuant to IRS instructions, the 1099-R should have had the gross distribution in box 1, $0 in box 2a, the policy cost basis in box 5, and box 7 should have been coded with a "6". Please correct me if I have misinterpreted the IRS instructions.

In reality, the 1099-R reported the difference between boxes 1 and 5 in box 2a. The result is an $80k+ taxable gain in box 2a.

I have spoken with the insurance company at length and they refuse to acknowledge or correct any error.

Is the 1099-R wrong and, if so, what should I do about it? For reasons not mentioned here, I'd rather not use the old "file properly and wait for the letter in the mail" approach. Is there an alternative?

Thanks

Reply to
kastnna
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Pay tax on the phantom income. I don't recommend that approach.

Phil Marti VITA/TCE Volunteer

Reply to
Phil Marti

My apologies Phil, but I don't understand what you mean.

I had no intention of paying tax on the gain as if I had actually incurred it. I didn't. But I didn't know if there was a form or procedure that would prevent the (inevitable?) paper audit I will get when the 1099-R from the insurance company doesn't match what I put on my return. As I said previously, for reasons not mentioned here, it will be substantially easier to fix this problem now rather than later.

thanks again for the assistance.

Reply to
kastnna

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