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IRS Eases Up On Withdrawals Linked To Annuity Exchanges

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The Internal Revenue Service is changing the way it treats annuity withdrawals that follow partial exchanges of assets from one annuity to another.

The IRS will reduce the period it considers when deciding whether a taxpayer made a partial exchange to avoid taxes on a withdrawal to 12 months, from 24 months, officials write today in IRS Revenue Procedure 2008-24.

The IRS originally set the 24-month consideration period in IRS Notice 2003-51.

The 2003 notice permitted the taxpayer to escape penalties if the taxpayer could show that the partial exchange was the result of a divorce, loss of employment or other major life event, and that a surrender of one of the annuities or withdrawal from one of the annuities was not contemplated at the time of the partial exchange, officials write.

In addition to shortening the exchange review period, the IRS also will remove the requirements relating to the taxpayer’s motives for making the partial annuity exchange, officials write.