Final Tax Return - FIL

[Pilot2013]

Wondered if there were any Tax attorneys or Tax Accountants on here that could provide direction.

In summary, DMIL passed a couple of years ago, and as is often the case, DFIL within a year. (2016). They had their modest home in an Irrevocable trust for last 15-20 years, so not included in any final assets. Cash was minimal, no vehicle, limits household belongings.

Based in his USPS mention, and minimal SS, he had a tax bill due at debt of ~$800. Since all of his cash was used (and then some from us) for burial expenses, I filled out the final tax form which is marked as "Deceased" at top of form, and included a note that there were no remaining assets after expenses at time of death.

We got a letter for the tax amount plus interest and penalty in June.

Any suggestions from those in the business?

 

[pb4uski]

Interesting question. They may try to make a case that the executor or whoever was paying the bills should have known about the tax bill and the cash available and that the taxes should have been paid or set aside ahead of the burial expenses. If that was the case, then it would have come out of your pocket any way since you paid the burial expenses in excess of cash available and the cash available would have been $800 lower so you would have paid $800 more.

Whether they would bother to make that case for $800, I dunno.... tend to doubt it be never say never.

Perhaps a tax practitioner will come along and weigh in.

Were there any income tax withholdings from his USPS pension? If so, have they been considered in the $800?

Also see https://www.irs.gov/businesses/smal...ling-the-final-returns-of-a-deceased-taxpayer

 

[Pilot2013]

Yes, Fed tax was withheld from his pension, just not enough to cover. It was the first year following his wife's death, and unfortunately, nothing was changed on his withholding despite the change in status for the next tax year filing.

I thought there might be some kind of exclusion for burial, but have no idea.

 

[Markola]

We went through DFIL dying with a bunch of smallish debts in 2015 and now DMIL is in hospice. DW served/s as power of attorney and executor for both. The attorneys we've worked with have both said "Their debts are not your responsibility." Further, we are entitled to reimbursement for our expenses in the process. Several companies and the state of California were out a few bucks and continued to write for a few months while DW convinced them that he was deceased. Sometimes they wanted a copy of his death certificate, which she'd send. Eventually they all stopped writing. However, we did get a bright neon green letter from a county in California last week seeking back taxes on a timeshare that DFIL walked away from in 2007. I did them the courtesy of calling to say "Good luck collecting."

 

[Pilot2013]

I meant to add, I have tried (unsuccessfully) to call the IRS. After 60 minute plus wait times, several times, I hang up.

 

[Sunset]

I meant to add, I have tried (unsuccessfully) to call the IRS. After 60 minute plus wait times, several times, I hang up.

Good luck with that.

How about returning the IRS invoice (after you make a copy for your records) with a death certificate ?

 

[cathy63]

You need Pub 559: https://www.irs.gov/publications/p559/ar02.html

A personal representative of an estate is an executor, administrator, or anyone who is in charge 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 to 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 to 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 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 to the United States, except where such other debt paid has priority over the debts due to the United States. 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.

No deduction for funeral expenses can be taken on the final Form 1040 of a decedent. These expenses may be deductible for estate tax purposes on Form 706.

My inexpert reading of the above quotes from Pub 559 is that you are personally responsible for the $800, because when you took control of your FIL's property you became his Personal Representative and you were required to determine whether there were tax obligations due before spending the estate's cash on his funeral. You can pay a tax attorney or accountant to advise you, but I think you're still going to owe the $800 plus penalties and interest, and then you're also going to owe the accountant too.

 

[pb4uski]

+1 Thanks for the cite cathy63. I think the easiest thing if for the OP to just pay the bill since he will ultimately be liable for it anyway... unfortunately sort of in the "no good deed goes unpunished" catagory.

 

[GrayHare]

The key phrase in that 559 quote is "if such obligations existed before distribution of the estate's assets". Did the estate have any assets? If not, I read 559 to mean the personal rep has no liability. However often left behind is some personal property with at least a nominal value, for example, cell phone, TV, books, etc. that the IRS could claim against.

 

[pb4uski]

I read it that if the decedent had more than $800 of cash at death, then the first $800 goes to the IRS and then the other bills get paid in priority (like in a bankruptcy liquidation). The OP suggested that some cash was used to pay burial expenses and then the OP paid the remainder.

 

[gauss]

Was FIL's cash that was used to pay the funeral expenses in a bank or other financial account?

If so, how did you gain access to the funds? Did you go to your county's Probate Court to get authority?

Is the house really safe in the Trust? Alternatively will a tax lien be applied to it, perhaps at the county level, that will prevent transfers or at least cause problems with future purchasers with mortgages seeking the required title insurance.

In this case it looks like the IRS not only placed a lien but also a levy (forced sale) against real estate held in an irrevocable trust. Ultimately the trust was upheld but legal fees may have been incurred in the process.

I would also be curious to know what the relationship is between the trustee and the family? Is it a truly arms-length relationship?

I think if assets of the estate were used to pay funeral expenses in lieu of paying Federal taxes that this was definitely an error in the part of whoever was administering the estate. The question is when does this become a personal liability. When I served as the court appointed Personal Representative for my Father's small estate, it was clear to me that Federal taxes needed to be paid first and that if I did not do this I would be personally liable.

If there was no official court appointment, then the liability issues are less clear to me - a casual observer.

Have you checked out the IRS Offer in Compromise (OIC) program. This program is available persons who have no hope of ever paying off their full IRS liability. The IRS will accept less than full payment and close the matter under this program. The question to me is OIC only available to "natural persons" or are other entities (ie Estates of Decedents) also covered. It may be easier for you to research this yourself on the Internet as opposed to trying to find an IRS employee to help.

Another resource is AARP Tax-Aide, whom I volunteer for. They typically prepare Final 1040 returns for individuals (but not Estate Tax, ie 760, nor Estate Income Tax ie 10401 returns)

-gauss

 

[cathy63]

The key phrase in that 559 quote is "if such obligations existed before distribution of the estate's assets". Did the estate have any assets? If not, I read 559 to mean the personal rep has no liability. However often left behind is some personal property with at least a nominal value, for example, cell phone, TV, books, etc. that the IRS could claim against.

Yes, you're correct that if the estate had no assets, then the personal rep has no liability for paying the decedent's personal income taxes. However, in this case, the OP said he paid the funeral expenses out of the estate's assets and then told the government there was no money left to settle the tax debt.

The IRS' position will be that this happened in the wrong order. OP should have first paid the taxes, then anything left over could have gone to the funeral.

 

[Ready]

I suspect the IRS has better things to do than to chase $800 and once they receive a copy of the death certificate this will go away.

 

[gauss]

I have confirmed that OIC is available to "An individual who is submitting an offer on behalf of a deceased person" from the application booklet.

I suspect that question is how much of the estate's assets were removed to pay for the funeral compared to the tax bill.

There is normally a $186 application fee for the OIC, but it appears to be waiveable under certain low income situations. Not sure if the low income test is applied to the estate or the individual submitting the application.

-gauss

 

[RobbieB]

I suspect the penalties and interest will increase if not paid.

 

[bw5972]

I handling my mothers estate, I needed to file and pay taxes due under her SSN for the current year. THEN get a separate number, EIN from the IRS to file next years income to the estate (one remaining lottery annuity payout).

 

[FireBug]

As I read this thread, I feel a headache coming on.

 

[EastWest Gal]

If there is an IRS office nearby, it is way easier to pay them a visit then to call. My son and I visited our local IRS office a couple of times in 2015, and resolved an odd issue in about an hour. They reversed some late payment penalty in my son's situation. Since you're going to have to pay something, bring your paperwork and checkbook and be prepared to pay the penalties. My son made the payment and got a receipt, which is nice proof that it was paid. Local IRS folks are regular neighborhood people, and were nice and helpful.

 

[Pilot2013]

Was FIL's cash that was used to pay the funeral expenses in a bank or other financial account?

If so, how did you gain access to the funds? Did you go to your county's Probate Court to get authority?

Is the house really safe in the Trust? Alternatively will a tax lien be applied to it, perhaps at the county level, that will prevent transfers or at least cause problems with future purchasers with mortgages seeking the required title insurance.

In this case it looks like the IRS not only placed a lien but also a levy (forced sale) against real estate held in an irrevocable trust. Ultimately the trust was upheld but legal fees may have been incurred in the process.

I would also be curious to know what the relationship is between the trustee and the family? Is it a truly arms-length relationship?

I think if assets of the estate were used to pay funeral expenses in lieu of paying Federal taxes that this was definitely an error in the part of whoever was administering the estate. The question is when does this become a personal liability. When I served as the court appointed Personal Representative for my Father's small estate, it was clear to me that Federal taxes needed to be paid first and that if I did not do this I would be personally liable.

If there was no official court appointment, then the liability issues are less clear to me - a casual observer.

Have you checked out the IRS Offer in Compromise (OIC) program. This program is available persons who have no hope of ever paying off their full IRS liability. The IRS will accept less than full payment and close the matter under this program. The question to me is OIC only available to "natural persons" or are other entities (ie Estates of Decedents) also covered. It may be easier for you to research this yourself on the Internet as opposed to trying to find an IRS employee to help.

Another resource is AARP Tax-Aide, whom I volunteer for. They typically prepare Final 1040 returns for individuals (but not Estate Tax, ie 760, nor Estate Income Tax ie 10401 returns)

-gauss

It's $800, I'm not going to those lengths to argue that "there is no hope of paying it off".

I was just wondering if there was some provision that you bury somebody with their money, rather than lay them out on the street for the garbage men to take. But God knows, the Federal Government needs that $800 to distribute to someone else.

 

[Pilot2013]

If there is an IRS office nearby, it is way easier to pay them a visit then to call. My son and I visited our local IRS office a couple of times in 2015, and resolved an odd issue in about an hour. They reversed some late payment penalty in my son's situation. Since you're going to have to pay something, bring your paperwork and checkbook and be prepared to pay the penalties. My son made the payment and got a receipt, which is nice proof that it was paid. Local IRS folks are regular neighborhood people, and were nice and helpful.

Thanks. I'll check on that. Can't hurt to ask one more time.

 

[Sunset]

It's $800, I'm not going to those lengths to argue that "there is no hope of paying it off".

I was just wondering if there was some provision that you bury somebody with their money, rather than lay them out on the street for the garbage men to take. But God knows, the Federal Government needs that $800 to distribute to someone else.

is there not a death "benefit" payment from SS ?

 

[RE2Boys]

is there not a death "benefit" payment from SS ?

All of $255!