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How are Variable Annuities Taxed for a Beneficiary - Question on Transfer vs Rollover

So my uncle passed away last year and had a variable annuity. As the beneficiary, I opened an Inherited Traditional IRA to receive these funds as a transfer from his variable annuity. Here's where it gets messy - the financial company holding the annuity accidentally processed it as a rollover instead of a transfer. Now the IRS has contacted me saying I owe almost $15,000 in additional taxes because rollover amounts get reported as taxable income, while transfers are non-taxable events that don't get reported to the IRS. The financial advisor who handled this transaction initially has since left the company. When I explained the situation to the new advisor, they tried to "fix" it by just changing their internal paperwork from "transfer" to "rollover" to match what was sent to the IRS. But that doesn't solve my tax problem at all! The IRS is saying the entire amount that moved from the annuity to my Inherited IRA (about $68,000) counts as taxable income for the tax year when it was moved. That's the exact difference between what the IRS says my taxable income should be versus what I reported on my return. My question is: If the financial institution corrects their mistake and resubmits the forms to properly show this as a transfer instead of a rollover, would that clear me of this additional tax obligation? If not, what steps should I take to get this corrected? I'm completely stressed out over a mistake that wasn't even mine!

Sofia Torres

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Something to be aware of: if the financial institution already reported the transaction to the IRS as a taxable event using a 1099-R, they are required to issue a corrected 1099-R (often called a 1099-R with the "CORRECTED" box checked). Simply changing their internal paperwork doesn't fix the issue with the IRS. Also, for future reference for anyone inheriting annuities: always be extremely clear about requesting a "direct trustee-to-trustee transfer" not a "rollover" when moving inherited annuity funds. Get confirmation in writing before the transaction processes, and if possible, have the receiving institution initiate the transfer rather than the sending institution.

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Is there a time limit on when a financial institution can issue a corrected 1099-R? My mom's situation happened almost 2 years ago and we're just now discovering the mistake.

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Sofia Torres

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There's technically no specific time limit for a financial institution to issue a corrected 1099-R. They can (and should) correct erroneous information even years later. For your situation with your mom, you generally have 3 years from the original filing deadline to file an amended return to correct mistakes. So even at 2 years out, you still have time to get this fixed. The financial institution may be resistant since it creates extra work for them, but they are obligated to provide accurate tax reporting. Be persistent and escalate to management if needed.

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Has anyone successfully had the IRS waive penalties and interest in a situation like this? I got the financial institution to admit their error, but the IRS is still charging me penalties and interest on the "deficiency" even though they agree I don't owe the base tax anymore.

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Yes, I had success getting penalties (but not all interest) waived by requesting penalty abatement due to reasonable cause. I explained that the error was made by the financial institution, not me, and provided their admission letter. The IRS has discretion here and often waives penalties when you can prove the error wasn't your fault.

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Anna Xian

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One thing nobody's mentioned yet - check if your audit is actually being conducted by the IRS or if it's been outsourced to a private collection agency. The IRS has been contracting with private firms for some types of enforcement, and they have different contact procedures. Look carefully at the letterhead and contact info on your audit notice. If it mentions Performant, CBE Group, ConServe, or Pioneer, those are private collection agencies working on behalf of the IRS. In that case, the standard IRS protocols might not apply.

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Aidan Percy

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That's interesting - I just double-checked and my notice is definitely from the IRS directly. It has the official Department of Treasury/IRS letterhead and mentions the specific IRS tax examination department. But this is good info for others who might be in a similar situation!

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Anyone else notice that the IRS seems to be auditing way more returns lately? I've had more clients get audit notices in the past 6 months than the previous 3 years combined.

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Rajan Walker

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I've heard they're focusing on high income returns (over $400k) and those with Schedule C business income after getting that increased funding. Targeting where they think they'll recover the most unpaid taxes.

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Ravi Sharma

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Just wanted to add my two cents as someone who's been running a small town transportation business for 3 years. Go with the LLC 100%. I started as a partnership and switched after a passenger threatened to sue when they tripped getting out of my car (nothing came of it, but scared me straight). The tax filing is identical either way (Form 1065), but the peace of mind knowing my house isn't on the line is worth the $100 annual fee my state charges. Also, banks and insurance companies took me more seriously as an LLC - got better rates on commercial insurance too.

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Paolo Ricci

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That's really helpful to hear from someone who's already doing something similar! Did you find it complicated to switch from partnership to LLC after you'd already started? I'm worried about setting up something and then having to change it later.

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Ravi Sharma

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It wasn't too bad switching from partnership to LLC, but definitely created some extra paperwork I could have avoided by starting with the LLC. I had to formally dissolve the partnership, file new paperwork for the LLC, get a new EIN, open new business bank accounts, and update all my insurance policies and client contracts. The whole process took about a month and cost around $500 including state fees and having my accountant update everything. Would have been much simpler to just start with the LLC from day one. The annual maintenance is super easy though - just a simple form and fee in my state. Your state might be different, so check your secretary of state's website for the specific requirements.

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NebulaNomad

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Has anyone used QuickBooks Self-Employed for a small driving service like this? Trying to figure out if it's worth the subscription vs just using spreadsheets for tracking mileage and expenses.

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I use it for my handyman business and it's great for tracking mileage automatically. The app uses GPS to track your trips and you just swipe business vs personal. At the end of the year it calculates all your mileage deductions automatically. Definitely worth it if you're driving a lot for business.

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Just a heads up - you really don't want to file your taxes without reporting all your income. If your missing W-2 shows you earned more than about $600, the IRS *will* notice the discrepancy and send you a letter. They'll adjust your taxes, and you'll likely end up owing money plus interest and maybe penalties. I made this mistake a few years back when I forgot about a small job I had done. Few months later got a scary letter from the IRS saying I owed them money. Not worth the stress!

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Is there a deadline for when you can still amend your return if you find the missing W-2 later? I'm in a similar situation and wondering how long I have to fix things if I discover more information after filing.

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You generally have 3 years from the original filing deadline to amend a tax return. So for 2024 taxes (filed in 2025), you would have until April 15, 2028, to submit an amended return using Form 1040-X. However, it's always better to get it right the first time if possible. If you know you're missing information now, using the substitute W-2 form (Form 4852) or requesting a wage transcript from the IRS is a much better approach than filing incomplete information and amending later.

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Has anyone tried calling the IRS directly about this problem? I lost a W-2 once and they were actually helpful, which surprised me lol.

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Ethan Wilson

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Good luck getting through to them! I tried calling the IRS last week and was on hold for 2 hours before giving up. Their phone lines are completely overwhelmed this time of year.

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Don't forget about state taxes too! You mentioned Texas which doesn't have state income tax, but if you moved from another state during those years you might still have state filing requirements for the time you lived there. I made this mistake when I didn't file for a couple years - sorted out federal but completely forgot about state taxes from when I lived in California. Ended up with a nasty surprise letter from the CA tax board years later.

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Marcus Marsh

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Thanks for bringing this up! I've actually been in Texas the entire time, so I think I'm ok on the state tax front. But that's a really good point for anyone else who might have moved around during their unfiled years.

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Josef Tearle

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Has anyone used a CPA to help with unfiled returns? I'm wondering if it's worth the cost versus doing it myself with software.

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I used a CPA after not filing for 3 years and it was 100% worth it. Cost me about $350 per year of unfiled taxes, but she found enough deductions that I hadn't known about to save me over $2000 in taxes. Plus she handled communicating with the IRS which was priceless for my anxiety.

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Josef Tearle

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That's really helpful, thanks! Did your CPA also help with negotiating penalties or setting up a payment plan, or just with preparing the actual returns?

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