Would someone happen to know where this is referenced in the IRS tax code?
I have the exact same situation. Prudential paid the wrong beneficiary on a life ins. policy. We sued, won, and were awarded proceeds. Proceeds from a life ins. policy are non-taxable. Prudential sent us a 1099-MISC with total amount of proceeds awarded as OTHER INCOME. Now the IRS wants us to pay $4000 in taxes on the total amount we received.
According to the IRS:
If the funds were received because you were a beneficiary, you should contact whoever issued the 1099-MISC and ask that it be corrected to show no income.
It may be that the funds went through the attorneys office, and the 1099-MISC was reported by the attorney's staff incorrectly.
Can you update me on what the result was for this? I have same situation.
The return of the premiums from the life insurance is not taxable but if there is interest included in the payments, that is taxable. You would need to separate out the premiums from the interest (if you are able to). Here is how to report.
Remember, if any of the amount you receive has interest, you will need to subtract that from your settlement. The remainder will then reported as non-taxable in the last bullet point described above.