My sister, on the other hand, was told that she did not have to claim this money as income. When you withdraw any money from an IRA, you almost always have to pay income taxes on the amount of the withdrawal. The bottom line is that if your share of the inheritance is still in the IRA, you should not have paid taxes. If your sister's share has been withdrawn from the IRA, she should have paid taxes. If either of you has filed an incorrect return, the mistake can be corrected by filing an amended return.
Many people confuse income taxes and estate taxes.
Someone may have told your sister that she did not owe estate taxes, which probably is true. Income taxes are a different matter. My wife is listed as the beneficiary with my three children as secondary beneficiaries. A. Withdrawals from retirement plans are fully taxable unless some portion can be attributed to after-tax contributions. Income tax will be due whether it is you, your wife or your children taking out the money.