Who pays the tax?

[JHaydenEA]

Facts:

Divorced Dad is terminally ill;

Dad's only asset is a 300K IRA (zero basis);

In January 2003, he transfer IRA to Roth IRA (with no
witholding), naming his two (adult) children as
beneficiaries;

Dad dies in September 2003, and children receive the money
tax free;

The children have dad's 1099R showing the 300K IRA
distribution but have no desire (or obligation?) to have a
tax return prepared;

How does IRS collect their tax money?

Jim Hayden EA

 

[Harlan Lunsford]

Facts:

Divorced Dad is terminally ill;

Dad's only asset is a 300K IRA (zero basis);

In January 2003, he transfer IRA to Roth IRA (with no
witholding), naming his two (adult) children as
beneficiaries;

Dad dies in September 2003, and children receive the money
tax free;

The children have dad's 1099R showing the 300K IRA
distribution but have no desire (or obligation?) to have a
tax return prepared;

How does IRS collect their tax money?

I'ts always been my understanding that IRS collects from the
estate, or failing that, from those who control or
controlled the estate, since executors/administrators are
personally liable.

If this isn't the case I'd sure like to know about it.

Bruce? What say you?

Cheer$,
Harlan Lunsford, EA n LA

 

[Phil Marti]

Dad's only asset is a 300K IRA (zero basis);

In January 2003, he transfer IRA to Roth IRA (with no
witholding), naming his two (adult) children as
beneficiaries;

Dad dies in September 2003, and children receive the money
tax free;

The children have dad's 1099R showing the 300K IRA
distribution but have no desire (or obligation?) to have a
tax return prepared;

How does IRS collect their tax money?

The decedent's personal representative has the
responsibility to file the final return. Since there's no
money in the estate to pay the tax, that's about all (s)he
can do.

Now think "All the President's Men": Follow the money.

The IRS collects through transferee assessment if the heirs
won't pay voluntarily. It would take a competent revenue
officer about 30 minutes. Sadly, 20 years ago one of our
stars in Los Angeles sent in an uncollectible package that I
just happened across. It had everything needed for a
transferee except the cover sheet. When I sent it back the
manager returned it with a nasty note saying, "You obviously
didn't see that the assets had been distributed." <sigh>

Phil Marti
Topeka, KS

 

[D. Stussy]

Facts:

Divorced Dad is terminally ill;

Dad's only asset is a 300K IRA (zero basis);

In January 2003, he transfer IRA to Roth IRA (with no
witholding), naming his two (adult) children as
beneficiaries;

Dad dies in September 2003, and children receive the money
tax free;

The children have dad's 1099R showing the 300K IRA
distribution but have no desire (or obligation?) to have a
tax return prepared;

How does IRS collect their tax money?

The IRS prepares a substitute for return, assesses tax, then
goes after the beneficiaries as transferees and/or the
executor to collect.

 

[Herb Smith]

Facts:

Divorced Dad is terminally ill;

Dad's only asset is a 300K IRA (zero basis);

In January 2003, he transfer IRA to Roth IRA (with no
witholding), naming his two (adult) children as
beneficiaries;

Dad dies in September 2003, and children receive the money
tax free;

The children have dad's 1099R showing the 300K IRA
distribution but have no desire (or obligation?) to have a
tax return prepared;

How does IRS collect their tax money?

Sorry, a final 1040 return MUST be filed for Dad, reporting
the taxable conversion of the traditional IRA to a Roth IRA.
If that is the only asset in his estate, then the taxes will
have to come from the Roth IRA. The beneficiaries get to
divide the AFTER-TAX balance in the account. BTW, any
earnings in the Roth ARE subject to income tax, as the
five-year holding period was not satisfied. A surviving
spouse, family member, or named executor should have the
return prepared (and paid for with estate assets).

 

[Arthur L. Rubin]

Facts:

Divorced Dad is terminally ill;

Dad's only asset is a 300K IRA (zero basis);

In January 2003, he transfer IRA to Roth IRA (with no
witholding), naming his two (adult) children as
beneficiaries;

Dad dies in September 2003, and children receive the money
tax free;

The children have dad's 1099R showing the 300K IRA
distribution but have no desire (or obligation?) to have a
tax return prepared;

How does IRS collect their tax money?

Hmmm. There may not be a probate estate, but there
may still be a personal representative approved by
a local court to handle the deceased's final bills.

HE (or she) has the obligation to prepare the final
1040. In this context, the money would have to come
from the beneficiaries.

Something here doesn't ring true to me. If he
(Dad) had no other assets, then who was paying his
medical expenses? (And can that person claim HIS
medical expenses as their own as his being a
"dependent" for medical purposes?)

 

[Dick Adams]

Facts:
Divorced Dad is terminally ill;
Dad's only asset is a 300K IRA (zero basis);

In January 2003, he transfer IRA to Roth IRA (with no
witholding), naming his two (adult) children as
beneficiaries;

Dad dies in September 2003, and children receive the money
tax free;

The children have dad's 1099R showing the 300K IRA
distribution but have no desire (or obligation?) to
have a tax return prepared;

How does IRS collect their tax money?

A friend of mine had a client with a very similar problem.
Decedent (Texas) sold his business and used the proceeds to
purchase stock in his daughter's name (Illinois). He died.
No return was filed.

The IRS tracked the money, she paid the taxes, but the
penalties were waived only because they were able to
establish that she was ignorant of the tax situation.
However, my friend remodeled his house from the audit fees.

In the case stated by the original poster: how much do the
children save by not paying the taxes? No return means the
year stays open. So they could whacked for three times the
tax given interest, penalties, and legal representation
(since this could be labeled as tax fraud).

Dick

 

[Barney Bird]

How does IRS collect their tax money?

As platitudinous as it sounds, our tax system is based on
voluntary self-assessment and compliance. The decedent's
estate is legally liable to file the return and pay the tax.
If the estate fails to meet it's obligations, IRS would be
left to resort to the transferee liability rules of §§ 6901
and 6902 in order to collect the tax due. From what little
I know about it, invoking transferee liability is a messy,
cumbersome, bureaucratic, and time-consuming process for
both the government and the transferees.

Barney Byrd

 

[Gene E. Utterback, EA]

Facts:

Divorced Dad is terminally ill;

Dad's only asset is a 300K IRA (zero basis);

In January 2003, he transfer IRA to Roth IRA (with no
witholding), naming his two (adult) children as
beneficiaries;

Dad dies in September 2003, and children receive the money
tax free;

The children have dad's 1099R showing the 300K IRA
distribution but have no desire (or obligation?) to have a
tax return prepared;

How does IRS collect their tax money?

In situations like this the IRS is allowed to "follow the
money" and take what is due them. What has happened has
created a "Transferee Liability Issue" and the children can
have their assets seized to cover the taxes and any related
penalties and interest if they willfully fail to file and
pay the taxes due from the estate proceeds.

Someone is responsible for making sure that a final return
is prepared and any taxes due are paid from the estate. The
children may THINK they got the money tax free but I doubt
that argument will go very far in court.

Sadly, the whole $300K is taxable in 2003 because of this
slick move. Had he left money in the traditional IRA he
would have paid no tax and the beneficiaries would have had
several options for taking the money and quite conceivably
could have spread out the tax burden over several years and
might have actually paid less than what is now owed.

Another fine example of pennywise and pound foolish tax
planning!

Gene E. Utterback, EA

 

[Harlan Lunsford]

The decedent's personal representative has the
responsibility to file the final return. Since there's no
money in the estate to pay the tax, that's about all (s)he
can do.

(snipped here and there)

Phil, you bring up an interesting point, i.e. the decedent's
"personal representative".

I know that what IRS literature (??) says, but..... what if
nobody steps forward and declares himself personal
representative? example, three children split the money
and neither one will agree to prepare a final return when/if
IRS ever contact him/her?

Ever seen such a case?

Cheer$,
Harlan Lunsford