Generally, life insurance funds you receive as a beneficiary due to the death of an insured person, isn't included in gross income and you don't have to report it. However, any INTEREST you receive on said funds is taxable and you should report it as interest received. So your best bet would be just to document if any interest had occurred while it was in your wife's SEP holding. If no interest occurred, then legally you do not have to pay tax on it. Hope this helps.