CP200 for deceased

[Jesse]

My brother-in-law's father passed away February 2008. Father had appointed a family friend as personal rep to handle the estate and disburse funds. According to my brother-in-law, beneficiaries have received all disbursements and the estate was closed out early in 2009.

Last week the personal rep, as address of record received notice and forwarded it to my brother-in-law which stated that income was under reported on the 2007 income tax return and there is a balance due of $15,000+/-.

This is totally out of my department.

Will the IRS allow my Brother-in-law to work with them or must it go through the personal rep?

If this tax is not paid can the IRS come after the beneficiaries?

[DaveO]

My experience is that only the personal rep can deal with the IRS. I can't speak with authority on the tax issue but I think the IRS will go after the persoanl rep first. What was the cause of the CP2000? If it was unreported stock sales the solution might not be that bad.

[Jesse]

My experience is that only the personal rep can deal with the IRS. I can't speak with authority on the tax issue but I think the IRS will go after the persoanl rep first. What was the cause of the CP2000? If it was unreported stock sales the solution might not be that bad.

Thanks for the quick response. It appears to be an IRA distribution that was reported as a roll-over, didn't take place, it was put into a non-retirement account. The preparer/financial advisor has since passed as well so what the mix up was is unknown.

[DaveO]

Ouch! That's going to leave a mark. The personal rep should be proactive in this since he is probably first in line to answer to the IRS.

[ChEAr$]

Ouch! That's going to leave a mark. The personal rep should be proactive in this since he is probably first in line to answer to the IRS.

True it is the personal representative who will have to talk with IRS.

However, everything has been wound up and he did it with good faith, having no knowledge
of anything else outstanding or potentially outstanding. He should consult competent
tax pro help in his area, someone familiar with representation issues.
Someone like an EA (of course!)

[erchess]

Estate Closed

I thought that if the estate is closed there is zero possibility of the IRS collecting from the estate or the heir(s). I thought that if they were going to collect anything they had to collect it from the personal representative or the executor and that in order to do that they had to prove fraud. Are things not quite that cut and dried? (I realize that often the personal representative and or the executor are heirs but even so the other heirs I thought could not be touched.)

[S T]

Still A Period of Time

There is still a period of time after filing final returns, that IRS can request more information, perform an audit, etc.

Tthe Personal Rep should have or might have filed I believe form 4810 for prompt assessment which would limit the period of time .

Request for prompt assessment (charge) of tax. The IRS ordinarily has 3 years from the date an income tax return is filed, or its due date, whichever is later, to charge any additional tax that is due. However, as a personal representative, you may request a prompt assessment of tax after the return has been filed. This reduces the time for making the assessment to 18 months from the date the written request for prompt assessment was received. This request can be made for any tax return (except the estate tax) of the decedent or the decedent's estate. This may permit a quicker settlement of the tax liability of the estate and an earlier final distribution of the assets to the beneficiaries.

On actual collection of tax assessments - not sure who the Government Agencies actually collect from.

Sandy

[erchess]

Thank you Sandy

for pointing out my error. At one time I knew the IRS had three years unless the executor or the representative acted properly to limit them to eighteen months.

My impression is that the executor (if there is no representative) or the representative is liable for any additional tax but that if they worked with a professional to whom they gave all necessary information they should get reimbursed by the pro's e and o insurance or deep pockets. I would however like to hear about that and also about what is done if questioning by the IRS or State appears for some reason to be likely.

[Lion]

Follow the money

I haven't had this situation but remember a couple of colleagues in a firm in which I am no longer an employee who had situations where the estate had assets and distributed assets to beneficiaries and found the IRS wanting to reclaim those distributions to satisfy additional taxes owed by the estate. Don't know how they came out. Definitely research the law so you know what to expect.

[Jesse]

I find this interesting

I thought the personal rep was responsible for accounting for all assets, income and liabilities of the estate, but I did not realize the personal liability involved. So if one takes the position of the personal rep they better make darn sure to have an accurate account of all liabilities and it would be wise to make a request for prompt assessment and then to "hang on" to all assets for the 18 month period. In my brother-in-law's situation the money has been distributed to the beneficiaries, so if they will not pay the tax liability the personal rep will be liable for the tax due. I would certainly think he would have recourse to go after the beneficiaries. Could get messy!

Pub 559 does say you can file Form 4810, Request for Prompt Assessment, however if the decedent failed to report substantial amounts of gross income (more than 25% of the gross income reported on the return) or filed a false or fraudulent return, the request will not shorten the period during which the IRS may assess the additional tax. However, such a request may relieve you of personal liability for the tax if you did not have knowledge of the unpaid tax.

[Jesse]

Should have kept reading

Pub 559
Request for discharge from personal liability for tax.
An executor can make a request for discharge from personal liability for a decedent's income, gift, and estate taxes. The request must be made after the returns for those taxes are filed. To make the request, file Form 5495, Request for Discharge From Personal Liability Under Internal Revenue Code Section 2204 or 6905. For this purpose, an executor is an executor or administrator that is appointed, qualified, and acting within the United States.

Within 9 months after receipt of the request, the IRS will notify the executor of the amount of taxes due. If this amount is paid, the executor will be discharged from personal liability for any future deficiencies. If the IRS has not notified the executor, he or she will be discharged from personal liability at the end of the 9-month period.

Even if the executor is discharged from personal liability, the IRS will still be able to assess tax deficiencies against the executor to the extent that he or she still has any of the decedent's property.

Insolvent estate. Generally, if a decedent's estate is insufficient to pay all the decedent's debts, the debts due the United States must be paid first. Both the decedent's federal income tax liabilities at the time of death and the estate's income tax liability are debts due the United States. The personal representative of an insolvent estate is personally responsible for any tax liability of the decedent or of the estate if he or she had notice of such tax obligations or had failed to exercise due care in determining if such obligations existed before distribution of the estate's assets and before being discharged from duties. The extent of such personal responsibility is the amount of any other payments made before paying the debts due the United States, except where such other debt paid has priority over the debts due the United States. The income tax liabilities need not be formally assessed for the personal representative to be liable if he or she was aware or should have been aware of their existence.

[Burke]

I would be interested to know how the IRA (which was rolled over into a NQ account) was handled on distribution of the estate. (1) Were beneficiaries named on the IRA? (2) Were proceeds paid to such beneficiaries OUTSIDE of the estate? (3) Were the proceeds paid INTO the estate (no named bene's) and distributed through it? If it had been rolled over properly, keep in mind the funds would have been taxable to the bene's when withdrawn, whether paid directly to them or through the estate. If it was distributed by the IRA custodian directly to the owner and not handled as a direct custodian-to-custodian transfer, they should have withheld at least 10% FIT on it, possibly SIT as well, depending on the state. There also should have been a 1099 issued to the deceased, so there would have been no reason not to include it on his tax return that year. The preparer's E&O may come into play if he had it. It seems as if the bene's may be ultimately responsible for the the income tax pro-rated individually on their share, since they received the proceeds one way or another. This situation is different from some arbitrary bill received late after the estate is closed.

[Jesse]

I would be interested to know how the IRA (which was rolled over into a NQ account) was handled on distribution of the estate. (1) Were beneficiaries named on the IRA? (2) Were proceeds paid to such beneficiaries OUTSIDE of the estate? (3) Were the proceeds paid INTO the estate (no named bene's) and distributed through it? If it had been rolled over properly, keep in mind the funds would have been taxable to the bene's when withdrawn, whether paid directly to them or through the estate. If it was distributed by the IRA custodian directly to the owner and not handled as a direct custodian-to-custodian transfer, they should have withheld at least 10% FIT on it, possibly SIT as well, depending on the state. There also should have been a 1099 issued to the deceased, so there would have been no reason not to include it on his tax return that year. The preparer's E&O may come into play if he had it. It seems as if the bene's may be ultimately responsible for the the income tax pro-rated individually on their share, since they received the proceeds one way or another. This situation is different from some arbitrary bill received late after the estate is closed.

Burke, it’s a bit of a mess. The IRA was reported on the tax return as a rollover for 2007, when Dad was still alive, he since passed away in 2008. However, unknown until a nice letter from the IRS, it was not known that the funds were not rolled over but instead deposited into a securities account, so there is no IRA. So indeed the taxes are due for 2007. It was almost almost $80,000 and there was no income tax withheld, the 2007 preparer, who was also the financial advisor, also passed away in 2008 so what happened? Who knows?.

The value of securities decreased dramatically and have been distributed to the beneficiary’s earlier this year. Since there is no dispute and the intent is to pay the tax due, I thought I could help with correspondence to help to try to abate the penalty. The personal rep, who was a friend of Dad’s handled this as a favor, was not paid and just tried to keep peace between the kids. He has since moved out of state to a warmer climate and the kids will be paying the tax, but it sounds like the personal rep will need to do the corresponding.