If you’ve been named as the executor, personal representative, or administrator of a decedent’s estate, you have the responsibility of handling the decedent’s tax obligations. Failing to properly address a decedent’s federal and state income tax issues can result in personal liability for unpaid taxes. This is an outcome no executor wants to face, which is why proper legal guidance is essential to ensure a smooth settlement of the estate.
Did the Decedent File Tax Returns and Pay Appropriately?
It’s not uncommon for descendants, particularly older adults, to have stopped filing tax returns years before their passing. This happens even though the decedent has taxable income from retirement accounts, Social Security, or investments. Age or disability does not eliminate the requirement to file and pay taxes, though many mistakenly believe it does.
If someone dies without filing tax returns for prior years, those obligations do not simply disappear. The executor must ensure that past-due returns are filed and any tax liabilities are paid.
Tax Compliance and Filing Requirements
When a decedent has unfiled tax returns, the IRS generally requires six years of prior returns to be filed to be considered compliant (though more may be required if fraud is suspected).
But what if you have no records to work from? A professional can help you pull IRS tax account transcripts, which show:
- Which tax years were filed
- Any outstanding tax liabilities
- Whether unreported income exists
Accessing these records gives you a clear picture of the decedent’s tax situation. If returns need to be prepared, it’s important to work with a qualified tax professional. Keep in mind that both estate tax returns and a decedent’s individual income tax returns are more likely to be audited compared to other types of returns.
While fraud is not the most common reason for non-filing, underreporting or failing to file can be viewed as a red flag. Executors should take steps to protect themselves from any appearance of wrongdoing.
Personal Liability Risks
The Federal Priority Statute provides that if an estate does not have sufficient assets to pay the debts and claims of the estate, then the executor must pay the federal tax claim before paying other claims. With few exceptions, the federal government’s claim against the estate has priority (31 U.S.C. § 3713). This means, among other things, that the government is entitled to be paid before the heirs and beneficiaries receive an inheritance.
If an executor pays other creditors or heirs before satisfying the federal government’s tax claim, they may be held personally liable for unpaid taxes, up to the amount they paid out. This is why it’s critical to handle tax obligations before making any other payments (31 U.S.C. § 3713(b); US v. Coppola, 85 F. 3d 1015 (2d Cir. 1996)).
Steps Executors Should Take to Protect Themselves
Here are key actions every executor should consider:
- Seek Professional Assistance: Don’t try to navigate estate administration and tax obligations alone.
- Notify the IRS of the Fiduciary Relationship: Filing the proper notice alerts the IRS that you are the executor ensures all tax correspondence is directed to you, and reduces the risk of tax-related fraud.
- Request a Prompt Assessment: Under 26 U.S.C. § 6501(d), the IRS must assess any tax liability within 18 months rather than the usual three-year window.
- Request a Discharge from Personal Liability: This compels the IRS to inform you within nine months if there are outstanding taxes or unfiled returns. If they fail to do so, you are released from personal liability (though the estate remains liable).
- Obtain Probate Court Approval: Always seek court approval for your actions as executor, particularly regarding payments and tax filings.
Being an executor requires careful investigation of a decedent’s tax situation, including unfiled returns, unpaid tax amounts, and potential future assessments. Understanding these issues can help reduce your risk of personal liability and ensure a smooth administration process.
Why Choose McDowell Law Group
At McDowell Law Group, we understand that serving as an executor can feel overwhelming, especially when tax issues are involved. Our experienced estate administration attorneys:
- Help executors investigate and resolve outstanding tax issues
- Work with tax professionals to prepare required returns
- Guide you through IRS notifications, assessments, and discharge requests
- Ensure compliance with federal and state requirements
- Minimize your personal liability risk and protect the estate’s assets
When you work with McDowell, you don’t have to face these challenges alone. Our team provides clear, practical advice every step of the way so you can fulfill your duties confidently and avoid costly mistakes.
Contact McDowell Law Group today to schedule a consultation and get trusted guidance for every stage of estate administration.