Need tax help about an 1099-R from a life insurance policy surrender that had a loan against it

A Life Insurance Company (XXX Co.) sent me a 1099-R that said that I received from them a total distribution of $6903.05. I did not. I received $2834.98. 

Further explanation of my case and the unusual circumstances surrounding it: In 1947, when I was 1 year old, my mother bought a life insurance policy for me from XXX Co. for an $11 annual premium. I knew nothing about this until XXX Co. located me in 2018 when I was 71 years old and told me the policy on me existed. (Apparently the government had passed some kind of law requiring life insurance companies to notify people like me about the existence of such policies.)  XXX Co. told me that my mother (deceased in 1977) had put in place some kind of an automatic loan-against-the-principal payment plan. This meant that if ever a premium payment was missed, the payment would be automatically made by a loan and the policy would not lapse. So, when my mother died in 1977 payments began to be automatically made by a loan from XXX Co. Interest on the loan accrued from then until 2018 (over 40 years) and the loan amount grew to over $4000.00. When I learned about the policy for the first time in 2018, I was told I could pay back the loan amount in full and stop the interest accrual and thus restore the policy to its original value. I decided just to surrender the policy for whatever it was worth after the “loan” was paid off, and be done with the whole matter. XXX Co. then sent me a check for $2834.98. 

This year, I was shocked to receive the 1099-R for $6903.05 from XXX Co. This causes me to have to pay an additional $700 in taxes. Again, I knew absolutely nothing about this policy or its ongoing “loan.” I should not have to report income that I never received and pay taxes on it. I did not take out the loan and the insurance company never notified me about what was happening for over 40 years!  I do not have a tax accountant to advise me and do not want to have to find one and throw several hundred more dollars at a problem I did not create.

A friend who owned a life insurance company advised me only to report as income only the amount of money that I actually received from XXX Co. and to write an explanatory letter to the IRS and attach it to my XXX Co. 1099-R. He felt that this would be sufficient and save me the additional cost of an accountant to advise me.

Here is the only way I could figure out how to use Turbo Tax Premium (which I purchased and downloaded) to recalculate my taxes using the amount I actually received from XXX Co.: I had to change the XXX Co. 1099-R Form in Turbo Tax like this: Box 1-Gross Distribution changed from $6,903.05 to $2,834.98  Box 2-Taxable amount changed from $6150.70 to $2082.63 ($2,834.98 – $752.35 found in box 5). I left Box 5-Employee contributions/Designated Roth contributions or insurance premiums:  $752.35 as it was.

I am concerned about putting amounts in Boxes 1 and 2 that are different than what XXX Co. has reported to the IRS. I called XXX Co., but they will give me no tax help or advice. I plan to include a letter to the IRS explaining why I changed the 1099-R amounts and also a copy of the check I received from XXX Co. Can someone help me understand if this is the best way to try and address my problem or if I should do something else. John