Keeping Up With the Paperwork

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Substantiation of expenses, tax forms, receipts–keeping up with your tax responsibilities requires a lot of paperwork.

Sometimes that paperwork may not even appear to have anything to do with your taxes.

In T.C. Memo. 2012-10, the taxpayer sent a letter to an insurance company requesting that her life insurance policy be cancelled.

She heard nothing from the insurance company from 1988, when she requested cancellation of the policy, until 2008, when the company sent Form 1099-R, reporting a taxable distribution. Because the insurance company sent the form to the wrong address, the taxpayer did not receive it, and did not report it on her tax return for that year.

The IRS did receive a copy of Form 1099-R, and sent a letter to the taxpayer in 2009. Upon contacting the insurance company, the taxpayer learned the policy had not been cancelled.

Instead, under an automatic loan provision in the policy, the company had loaned her money for premiums. In 2007, when the amount of the loan equaled the cash value of the policy and no more loans could be made, the policy lapsed.

At that point, the insurance company used the cash value to pay off the loan, then deducted the premiums paid from the money loaned. The result was a taxable distribution of $5,625.

The taxpayer said she cancelled the policy by sending the letter. The IRS says she received income as indicated by Form 1099-R.

The court, lacking a copy of the policy or the taxpayer’s letter cancelling the policy, agreed with the IRS.

Taxing Lesson: Paperwork–it’s more than just a nuisance.

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