First, I am always loathe to change amounts on forms that are received from others for 2 reasons
1) that form is reported to the IRS and they probably will do a match against your return, and if the mounts don't match, it would cause an audit (which could be as simple as a letter requiring the tax on the difference be paid)
2) any penalties assessed will not be covered by the Turbo Tax guarantee because you did not input the document as received. "garbage in / garbage out' will be their argument
Sounds like what you really have for income is the accumulated value of the policy over its face value, less interest expense associated with the money "you" borrowed over the years.
Did you receive the payout of the life insurance proceeds? meaning the face value of the policy? That is not taxable, but it was not mentioned in your post that in return for that $4000 loan from the Insurance Company, you did receive something of value that should be much more than the $6,000!
The income has been reported to the IRS (the $6000) but then the interest from the loan is not deductible because it's not secured by real property.
What you just may have to do is just rationalize that while you reported $6000 of income and paid some tax on it and then less the $4000 to pay off the 'loan' there is still found money in your lap that you didn't know you would ever receive but it is more than the zero you had before you knew it existed! (plus I suspect you received the policy value tax free right?????)
While my advise is 'free' so it the advice from your Life Insurance buddy. Can he document for you that changing the amount that the insurance company reported to the IRS is the right thing to do?
The Insurance company is reporting the amount they did because it technically is the income you received and under the terms of the contract. And further under the terms of the loan contact you had to borrower the money to protect the accumulated value which is exactly what appears to have occurred.
sorry as that is probably not what you wanted to hear. Anytime folks have challenges with figuring out TT, it's normally because TT is programmed to follow the IRS rules and trying to circumvent those rules causes the user to 'fight' with the TT software.
