IRS penalty

Forum|Forum|6 years ago
October 4, 2019
3 replies
33 views

I received a letter from the IRS, stating that I understated my income on my 2017 return. It was listed as retirement income. I had no idea what it was, until I googled the name of the company and called them. It turned out to be a check from Integrity Life Insurance Company, that I thought was a life insurance payment, because my ex-husband had passed away. I thought it wasn't taxable. It was actually from an annuity he had, that I didn't know about, but I received it because he died. I moved to a new address after receiving the check. They sent a 1099-R, but I never saw it, I assume because the forwarding period had expired. I have a copy now, because I called the company listed on the letter from the IRS. I reported all of the income I knew about, from all of the tax forms I had. Now I am being charged a penalty. What course of action do you suggest?

macuser_22

Alumni - Champ

If you failed to report the income and the 1099-R then simply pay the tax and penalty and you are done unless you have reason to believe that is is not taxable, then dispute. The letter should tell you how to pay or dispute.

It might not be all taxable. The box 2a on the 1099-R should tell you the taxable amount, if that is less that the IRS is billing you for then by all means dispute by calling the IRS on the number that the letter should have.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

dmertz

Level 15

You certainly have to pay the additional income tax liability that resulted from this distribution and the interest on the late payment, but you might be able to pursue relief from the penalty:

https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief

BillM223

Level 15

dmertz is correct that you have to pay the additional tax due and any interest in any case (but see below), but you may be able to get an abatement of the penalty (as the link he gave you shows). After all, It was a check from a "life insurance company" and it was your "ex-husband" with whom, presumably, you did not frequently communicate. However, you may feel awkward in how you would word such a response. In this case, you might turn to a local Enrolled Agent or CPA to represent you to the IRS, which would mean writing the letter to the IRS in terminology that the IRS understands. You can find local Enrolled Agents at https://taxexperts.naea.org/ and use your search engine to find local CPAs.

macuser_22 does open another issue: it's possible that not all of the annuity income was taxable. Yes, sometimes that will be reflected in box 2a on the 1099-R, but all too often, the annuity provider is not aware of whether or not the taxable amount should be less than the total distribution.

The issue is that if your ex-husband made any after-tax contributions to the annuity while he was alive, then when these contributions (called "cost" or "basis") are returned to you (according to a formula), you do not report the amount of basis returned as taxable income.

The reason that this is important is because any amount that is non-taxable reduces the tax you owe as well as the interest, whereas the first issue is just trying to avoid paying the penalty.

Sadly, I have had clients who were widows who had no idea whether or not their late husbands made after-tax contributions to their annuity. You can ask the annuity company if they know (but they may not for various reasons) or his employer to see if they know, but this is perhaps another reason to ask for local professional tax help, because the local Enrolled Agents and CPAs will know what questions to ask the annuity provider and the employer, as well as what to look for in your late husband's papers.

Good luck.

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