Estate tax deficiency question


G

GarySport

An estate is equally divided among 4 heirs, one of whom is
the Executor. When the estate is liquidated, the final
estate income tax form is filed and any taxes paid, and the
estate assets are then divided among all 4 heirs. What
would happen 2-3 years later if the IRS said there was some
tax deficiency in a previous year either in the estate
income tax return or the decedant's personal income tax
return? I would think that each of the 4 heirs would be
liable for paying 1/4 of the tax
deficiency/penalties/interest, but might not be happy to do
so. Or would the IRS say the Executor is liable for the
whole deficiency of the already-dispensed estate? Thanks.
 
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P

Phil Marti

When the estate is liquidated, the final
estate income tax form is filed and any taxes paid, and the
estate assets are then divided among all 4 heirs. What
would happen 2-3 years later if the IRS said there was some
tax deficiency in a previous year either in the estate
income tax return or the decedant's personal income tax
return? I would think that each of the 4 heirs would be
liable for paying 1/4 of the tax
deficiency/penalties/interest, but might not be happy to do
so. Or would the IRS say the Executor is liable for the
whole deficiency of the already-dispensed estate?
Door number three. The executor has fiduciary
responsibility and each of the heirs has transferee
liability up to the amount received from the estate. IRS
will follow the path of least resistance and let them work
it out amongst themselves, either amicably or in state
court.

Phil Marti
Topeka, KS
 
D

Dan Evans

What
would happen 2-3 years later if the IRS said there was some
tax deficiency in a previous year either in the estate
income tax return or the decedant's personal income tax
return?
Then the executor could be in trouble.

State law *might* give the executor the right to recover the
additional estate tax (and interest) from the beneficiaries,
but it is usually better:

1. Not to distribute all of the estate until an estate tax
closing letter has been received; and

2. Not to distribute an estate without a "refunding
agreement" from the beneficiaries in which they promise to
refund any money that might still be owed by the estate.
I would think that each of the 4 heirs would be
liable for paying 1/4 of the tax
deficiency/penalties/interest, but might not be happy to do
so. Or would the IRS say the Executor is liable for the
whole deficiency of the already-dispensed estate? Thanks.
As I said above, state law *might* provide a remedy for the
executor, but under federal law, the executor is personally
liable, so the federal government can go after the executor
personally. The federal government could also go after the
beneficiaries for transferee liability, but the government
is not required to.

*Dan Evans
*"One is not superior merely because one
*sees the world as odious."
*Francios Rene de Chateaubriand (1768-1848).
 
G

Gene E. Utterback, EA

GarySport said:
An estate is equally divided among 4 heirs, one of whom is
the Executor. When the estate is liquidated, the final
estate income tax form is filed and any taxes paid, and the
estate assets are then divided among all 4 heirs. What
would happen 2-3 years later if the IRS said there was some
tax deficiency in a previous year either in the estate
income tax return or the decedant's personal income tax
return? I would think that each of the 4 heirs would be
liable for paying 1/4 of the tax
deficiency/penalties/interest, but might not be happy to do
so. Or would the IRS say the Executor is liable for the
whole deficiency of the already-dispensed estate? Thanks.
I believe that the IRS would look to the executor as the one
personally responsible to cover the deficit. After all, it
was he who finalized the estate and distributed the assets.

Gene E. Utterback, EA
 
B

Benjamin Yazersky CPA

GarySport said:
An estate is equally divided among 4 heirs, one of whom is
the Executor. When the estate is liquidated, the final
estate income tax form is filed and any taxes paid, and the
estate assets are then divided among all 4 heirs. What
would happen 2-3 years later if the IRS said there was some
tax deficiency in a previous year either in the estate
income tax return or the decedant's personal income tax
return? I would think that each of the 4 heirs would be
liable for paying 1/4 of the tax
deficiency/penalties/interest, but might not be happy to do
so. Or would the IRS say the Executor is liable for the
whole deficiency of the already-dispensed estate? Thanks.
There is transferee liability. Each heir would be
proportionately liable.
 
G

GarySport

Dan said:
1. Not to distribute all of the estate until an estate tax
closing letter has been received; and
So if one waits to distribute the assets after the final tax
return is filed and a closing letter is received, interest
will accrue under the Estates tax number. Since there will
not be another tax return, will the 4 heirs then pay that
interest as "nominees". If so, how does the executor
reconcile that interest with the IRS computers, since
interest will be reported under the estate tax number. It
sounds like a never-ending cycle.
2. Not to distribute an estate without a "refunding
agreement" from the beneficiaries in which they promise to
refund any money that might still be owed by the estate.
I agree that all heirs receiving any distributions should
sign a notarized form promising to repay their proportionate
share of any unknown expenses, unforeseen liabilities, tax
deficiencies, etc. that could occur at a later date.

Thanks.
GS
 
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G

GarySport

Dan said:
1. Not to distribute all of the estate until an estate tax
closing letter has been received; and
I think in this instance about 50% of the estate liquid
assets would likely be distributed earlier (mainly to toss
the other heirs a cookie to keep them quiet), and the rest
reserved to operate the estate, pay taxes, etc, hoping to
liquidate all the real estate as soon as possible in the
first year to avoid hiring people to maintain it.. So I'm
hoping the estate won't last more than 9-12 months; a buyer
has expressed interest in the properties for years and may
purchase it rather quickly. By the way, about how long
after a final estate tax return does it take to receive an
"estate tax closing letter" and is there a certain procedure
for requesting that?

Thanks.
GS
 
S

Stuart O. Bronstein

(e-mail address removed) (GarySport) writes:
Door number three. The executor has fiduciary
responsibility and each of the heirs has transferee
liability up to the amount received from the estate. IRS
will follow the path of least resistance and let them work
it out amongst themselves, either amicably or in state
court.
It is (at least used to be) possible to have the IRS
expedite the process for estates, in which case they will
quickly give you assurance that you are clear from future
audit.

Stu
 
D

D. Stussy

GarySport said:
An estate is equally divided among 4 heirs, one of whom is
the Executor. When the estate is liquidated, the final
estate income tax form is filed and any taxes paid, and the
estate assets are then divided among all 4 heirs. What
would happen 2-3 years later if the IRS said there was some
tax deficiency in a previous year either in the estate
income tax return or the decedant's personal income tax
return? I would think that each of the 4 heirs would be
liable for paying 1/4 of the tax
deficiency/penalties/interest, but might not be happy to do
so. Or would the IRS say the Executor is liable for the
whole deficiency of the already-dispensed estate? Thanks.
Why wait 3 years? File the "prompt assessment" request and
get the whole thing wrapped up in 18 months.... :)

The IRS would probably first assess against the executor,
then follow the assets under their "transferee rules".
 
M

Martha Matthews, EA

There is transferee liability. Each heir would be
proportionately liable.
OH law says that if a distribution is made by the executor
at least 3 months after executor's appointment the heirs are
responsible. If the distribution is made before the
creditors claim period a notice is sent telling them that
they masy have to pay back funds if needed. Once the estate
is closed the Executor can send a letter to IRS asking to be
relieved of personal responsibility.

Martha Matthews, EA
 
D

Dan Evans

Stuart O. Bronstein said:
It is (at least used to be) possible to have the IRS
expedite the process for estates, in which case they will
quickly give you assurance that you are clear from future
audit.
IRC Section 2204(a):

"If the executor makes written application to the Secretary
for determination of the amount of the tax and discharge
from personal liability therefor, the Secretary (as soon as
possible, and in any event within 9 months after the making
of such application, or, if the application is made before
the return is filed, then within 9 months after the return
is filed, but not after the expiration of the period
prescribed for the assessment of the tax in section 6501)
shall notify the executor of the amount of the tax. The
executor, on payment of the amount of which he is notified
(other than any amount the time for payment of which is
extended under sections 6161, 6163, or 6166), and on
furnishing any bond which may be required for any amount for
which the time for payment is extended, shall be discharged
from personal liability for any deficiency in tax thereafter
found to be due and shall be entitled to a receipt or
writing showing such discharge."

Notice that section 2204 does not protect the *estate* from
the assessment of additional estate tax, but only releases
the executor from personal liability.

There is no official form for the request for prompt
assessment under section 2204, and the regulations state
that the request should be made to the IRS officer with whom
the estate tax return was filed.

*Dan Evans
*"One is not superior merely because one
*sees the world as odious."
*Francios Rene de Chateaubriand (1768-1848).
 
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G

GarySport

Notice that section 2204 does not protect the *estate* from
the assessment of additional estate tax, but only releases
the executor from personal liability
I assume that's just for the Estate Tax return. Is there
any early form for release of liability for an estate income
tax return?

Thanks.

GS
 
C

CBres77376

Once returns are filed a 4810 can be filed requesting a
prompt assessment of taxs. This limits the I.R.S. to 18
months. I am considering using one but have heard that its
use prompts and or greatly increases the chance of an audit.
 
D

Dan Evans

Notice that section 2204 does not protect the *estate* from
I assume that's just for the Estate Tax return. Is there
any early form for release of liability for an estate income
tax return?
Section 6501(d) of the Internal Revenue Code provides that,
upon the written request of the executor (or administrator),
the normal statute of limitations for any tax (other than
estate tax) for which a return was required by the decedent
or the decedent's estate may be reduced from (a) three years
from the date the return was filed, to (b) 18 months from
the date of the request. This written request should be
made on Form 4810.

Although this request for prompt assessment does not apply
to the federal estate tax, it does apply to any gift tax
returns filed by or for the decedent, as well as any federal
income tax returns filed by the decedent or the decedent's
estate.

And the shorter statute of limitations will protect not just
the executor but also the estate and the beneficiaries of
the estate.

However, the shorter statute of limitations will not apply
to fraudulent returns or unfiled returns (section 6501(c)),
any returns with "substantial omissions" (section 6501(e)),
and certain other types of assessments described in section
6501(c).

*Dan Evans
*"One is not superior merely because one
*sees the world as odious."
*Francios Rene de Chateaubriand (1768-1848).
 
D

Dan Evans

Once returns are filed a 4810 can be filed requesting a
prompt assessment of taxs. This limits the I.R.S. to 18
months. I am considering using one but have heard that its
use prompts and or greatly increases the chance of an audit.
Form 4810 reduces the statute of limitations for income
taxes, as well as gift tax, but not estate tax. See section
6501(d).

A request for prompt assessment of estate tax is authorized
by section 2204, but there is no printed form for the
request.

*Dan Evans
*"One is not superior merely because one
*sees the world as odious."
*Francios Rene de Chateaubriand (1768-1848).
 
P

Phil Marti

Once returns are filed a 4810 can be filed requesting a
prompt assessment of taxs. This limits the I.R.S. to 18
months. I am considering using one but have heard that its
use prompts and or greatly increases the chance of an audit.
Unless things have changed, every 706 is at least reviewed
by a real live humanoid.

Phil Marti
Topeka, KS
 
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M

Martha Matthews, EA

Notice that section 2204 does not protect the *estate* from
I assume that's just for the Estate Tax return. Is there
any early form for release of liability for an estate income
tax return?
I don't know if there is a form yet. I used letters when I
did it. Haven't done it in a long time.

Martha S Matthews, EA
 
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M

Martha Matthews, EA

Once returns are filed a 4810 can be filed requesting a
prompt assessment of taxs. This limits the I.R.S. to 18
months. I am considering using one but have heard that its
use prompts and or greatly increases the chance of an audit.
Well yes, if they have to do it earlier thay will look at it
closer. Whether it's wise to file depends on the situation.
There are cases where the IRS still goes after income even
if it was covered by prompt release.

Martha S. Matthews, EA
 

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