I have a client that has received a notice from the IRS that they owe a significant amount of tax for 2017. Here is the situation:
Mr. Smith owned a Traditional IRA using a variable annuity and named his wife as beneficiary. Mr. Smith died and on the claim form, Mrs. Smith elected deferral of the payout. Mrs. Smith shortly after decided to transfer the funds from the annuity company to an Investment company as Custodian for a Traditional IRA in her name. She submits the transfer paperwork and the annuity company obliges and sends the funds directly to the new Trustee (made payable to the new Trustee) and it was deposited well within 60 days.
Annuity company issued the 1099 with a code 4 for death distribution shows the full amount as taxable to Mrs. Smith. The company will not issue the 1099 any other way. It should have been claimed and spousal continuation and then transferred, but that's water under the bridge at this point. Any thoughts or options for the best way to handle?