A client received notice from IRS saying a rollover of an annuity was not allowed. The distribution was a death benefit (code 4) that was a non-qualified annuity. Does a 1035 exchange apply or what are my options?
You takes your money and you pays your taxes.
Whatever your guy did, it's far too late to fix it now.
Your client will owe taxes based upon the limited information you supplied, His payment will help reduce the deficit
Let me provide a little more detail. In 2008, client was disbursed a check from her non-qualified annuity for 24k. She immediately rolled all funds over into an identical annuity with another carrier. We recorded it as a rollover on her 2008 taxes.
The IRS is indicating that it is taxable. Is this because the funds were non-qualified. Or do we merely need to document the timely redeposit.
I believe that Phoebe and MJ are correct.
When she cashed out the inherited annuity, it was taxable regardless of what she did with the money.
This. 1035 only works if you exchange policies. By taking cash in your hand, you've blown it.
I'm not sure an inherited annuity would have been eligible for 1035 treatment, in any case. You'd have a hard time meeting the "same owner and annuitant" test.
The problem is it was non-qualified. Thus ineligible for 1035 rollover.
Tell client to bend over and clench.
