I think the credit union messed up my wife's inherited IRA and now we have a 1099-R taxable distribution

So last year my mother-in-law passed away unexpectedly. Among other things, she had an IRA at a local credit union that was supposed to transfer to my wife as the beneficiary. We thought everything was handled correctly at the time. Fast forward to today, and we just received a 1099-R in the mail showing the entire distribution as taxable income! This is absolutely NOT how an inherited IRA is supposed to work. The credit union apparently distributed the entire account instead of properly transferring it as a beneficiary IRA. We're talking about $43,500 that's now showing as fully taxable when it should have been eligible for continued tax-deferred growth if transferred correctly. This is going to completely mess up our taxes for this year. Has anyone dealt with something like this before? Can this even be fixed at this point since the 1099-R has already been issued? I'm furious at the incompetence displayed by this credit union.

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18 comments

Oliver Alexander

•8M

This is unfortunately a common problem with smaller financial institutions that don't handle inherited IRAs very often. What likely happened is that instead of processing a "trustee-to-trustee transfer" or setting up a proper "inherited IRA," they processed it as a distribution to your wife. You need to act quickly. Contact the credit union immediately and explain the error. Request to speak with their IRA specialist or department manager, not just a regular teller or customer service rep. Bring documentation showing your wife was the named beneficiary. If they acknowledge the mistake, ask them to correct the transaction by treating it as a 60-day rollover (though this has time limitations) or request they issue a corrected 1099-R that properly codes the distribution.

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Oliver Alexander

•8M

You're right to be concerned about timing. For a 60-day rollover, the clock starts ticking from when they received the distribution, not when they received the 1099-R. If it's been more than 60 days since the distribution was made, that option may be off the table. However, if the credit union truly made an administrative error, they may be able to correct the 1099-R to show this was not a taxable distribution. The IRS does allow for financial institutions to make these kinds of corrections when there was a legitimate error. This would be coded differently on a corrected 1099-R.

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Adrian Hughes

•8M

I had almost exactly this situation when my father passed away in 2022. The credit union gave me the runaround for weeks until I finally uploaded all my documents to taxr.ai (https://taxr.ai) and they analyzed everything and clearly explained what happened and what my rights were. The problem is that these small financial institutions often don't understand the difference between a regular distribution and a beneficiary transfer. Taxr.ai showed me exactly what forms and language to use with the credit union. They analyzed the 1099-R and my father's beneficiary designation form and created a customized letter I could send.

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Adrian Hughes

•8M

They have actual tax professionals who review everything, but they use AI to make the process faster. You upload your documents securely and they analyze them to identify the specific problem and solution. It's not just templates - they customize everything to your situation. Yes, they absolutely helped get my 1099-R corrected. The letter they helped me create cited specific IRS regulations that the credit union couldn't argue with. The institution actually issued a corrected 1099-R within two weeks after months of me getting nowhere on my own.

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Ian Armstrong

•8M

I need to follow up on my skeptical comment about taxr.ai. I actually tried the service after posting that comment and I'm genuinely surprised. They reviewed my aunt's IRA beneficiary forms and the incorrect 1099-R I received, then clearly explained that the bank had coded it as a regular distribution (code 7) instead of a death distribution to a beneficiary (code 4). They created a detailed letter citing Treasury Regulation 1.401(a)(9)-4 and provided step-by-step instructions for getting it corrected. My bank actually called me back the day after I sent it and is processing a correction. Wish I'd known about this months ago instead of stressing about a huge tax bill.

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Eli Butler

•8M

After dealing with a similar situation with my brother's 401k, I ended up having to call the IRS directly for guidance. It took me THREE DAYS of constant redialing to get through to anyone. Absolute nightmare. Someone recommended Claimyr (https://claimyr.com) to me and I was super skeptical but checked out their demo video (https://youtu.be/_kiP6q8DX5c) and figured I'd try it since nothing else was working. It actually got me connected to an IRS agent in about 20 minutes instead of days of redial hell. The IRS agent confirmed that the financial institution had to issue a corrected 1099-R with the proper distribution code for a beneficiary IRA. They also explained that I needed to get a letter of determination from them to take back to the bank if they refused to fix it.

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Eli Butler

•8M

It's basically a service that navigates the IRS phone tree and waits on hold for you. When they finally get through to a real person, they call you so you can talk directly to the IRS agent. It's not like they're pretending to be the IRS or anything sketchy. Yes, it absolutely connects you to a real IRS person. That's the whole point. I spoke with an actual IRS agent who looked up the regulations specific to inherited IRAs and beneficiary distributions. The information they provided was critical in getting the bank to fix their mistake.

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Lydia Bailey

•8M

I have to eat my words about Claimyr. After posting my skeptical comment, I decided to try it because I was desperate. I'd been trying to reach the IRS for almost 3 weeks about a similar inherited IRA problem. I was completely shocked when my phone rang about 25 minutes after signing up, and it was actually an IRS representative on the line. They walked me through the exact process for disputing an incorrectly coded distribution from my dad's old 403(b) plan. Turns out there's a specific form (Form 1099-R Box 7 Coding Correction Request) that most banks don't tell you about. The agent also explained that I could request a Private Letter Ruling if the financial institution refused to correct their error, though that's a last resort. Worth every penny to finally get real answers.

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Mateo Warren

•8M

Make sure you get this fixed before filing your taxes! My cousin had something similar happen with his dad's IRA at a small bank and ended up paying taxes on the whole thing because he didn't realize the mistake until after he filed. He tried to amend later but it was a huge headache that took like 18 months to resolve. The key issue is the distribution code in Box 7 of the 1099-R. For a properly handled beneficiary IRA distribution due to death, it should be coded as a "4" not a "1" or "7". If it's coded wrong, the IRS computers automatically treat it as fully taxable.

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Mateo Warren

•8M

You really want to get the corrected 1099-R before filing if at all possible. Filing with an explanation that contradicts the 1099-R information the IRS has on file often triggers correspondence audits or notices. If you're running close to the deadline, file an extension to give yourself more time to get this corrected. An extension gives you an additional six months to file (though not to pay, but in this case the correct tax should be much lower or zero). The credit union should be able to issue a corrected 1099-R within a few weeks if they acknowledge their mistake.

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