1099-MISC for Closed Estate, Tax Question

[38Chevy454]

I have a question for consideration of what, if anything, I should do.

Quick background: I was executor for my parent's estate. Been closed out since 2015 as last tax year for the estate. Due to a lawsuit and settlement, as the estate representative I received a $1000 settlement check that was for my father's time as a retiree. Apparently the retiree medical insurance had not reimbursed some expenses properly for many people, and the class action lawsuit was filed on behalf of retirees. The check was made out to me as the estate rep, and I split it up as per the rest of the estate proceeds were, 1/3 to each child last December 2020. So far so good, an extra $333 to spend around Christmas, nice little unexpected bonus.

Here is the question: I received a 2020 tax year 1099-MISC, in my father's SSN, and his name, with me listed as estate rep on line below his name. My father has not filed any tax return in his name and SSN since he died in 2012. The estate (which had it own EIN) that took over his estate, was closed after 2015 tax year. So do I need to even do anything with regard to this 1099-MISC form? I am leaning to doing nothing. This is obviously the only income that has any reporting on my father's SSN. No tax would be due on this small of amount. Estate is also closed and no tax returns since last one in 2015.

Does anybody have opinion on what I should do? Thanks for the help.

 

[RetireeRobert]

So do I need to even do anything with regard to this 1099-MISC form? I am leaning to doing nothing. This is obviously the only income that has any reporting on my father's SSN. No tax would be due on this small of amount. Estate is also closed and no tax returns since last one in 2015.

Does anybody have opinion on what I should do? Thanks for the help.

I would say you are correct and need to do nothing, since the $1000 would be the only income in your father's SSN, and that amount would not reach taxable levels as the only income. Do nothing.

 

[MBAustin]

Hopefully a CPA on the board will comment but I tend to agree that you don't need to do anything with it.

 

[SecondCor521]

I'm not an expert on estate tax returns. Not a CPA. But I am a bit familiar with Form 1041 because I help file one for a trust.

I don't think it matters that the estate was closed. Closing an estate is a probate court issue; the receipt of a 1099-MISC is an IRS issue.

But in theory since the $1000 is over the exemption amount for an estate, you should file a 2020 estate tax return on Form 1041.

However, on that estate tax return, the estate would report the $1000 income and then the distribution of that $1000 to each of the three recipients. It would then have $0 in taxable income and $0 in tax due.

The estate should also issue 1041 K-1s to the three recipients. Each recipient should then use that K-1 to report their $333ish income on their 2020 tax return.

It's possible that the estate needs to issue state K-1s as well for any state tax implications.

The income retains it's character, so interest income to the estate that passes via a K-1 is reported as interest on the recipient's 1040. Ditto capital gains, tax exempt interest, etc.

That's probably how it should be done and what the IRS is expecting to be done. Whether people in your situation choose to bother, I dunno.

 

[gauss]

I'm not an expert on estate tax returns. Not a CPA. But I am a bit familiar with Form 1041 because I help file one for a trust.

I don't think it matters that the estate was closed. Closing an estate is a probate court issue; the receipt of a 1099-MISC is an IRS issue.

But in theory since the $1000 is over the exemption amount for an estate, you should file a 2020 estate tax return on Form 1041.

However, on that estate tax return, the estate would report the $1000 income and then the distribution of that $1000 to each of the three recipients. It would then have $0 in taxable income and $0 in tax due.

The estate should also issue 1041 K-1s to the three recipients. Each recipient should then use that K-1 to report their $333ish income on their 2020 tax return.

It's possible that the estate needs to issue state K-1s as well for any state tax implications.

The income retains it's character, so interest income to the estate would pass through on a K-1 and be reported as interest on the recipient's 1040. Ditto capital gains, tax exempt interest, etc.

That's probably how it should be done and what the IRS is expecting to be done. Whether people in your situation choose to bother, I dunno.

+1

That is how I understand it also ($600 exemption for the estate. If more than that, the 1041 is required) . I spent the better part of yesterday and today working 1041s after a successful EIN requests for my late MIL.

I was pleased to realize that the property taxes that "the estate" paid for her Condo last year wiped out any of taxable income the the estate received.

-gauss

 

[RetireeRobert]

I still think OP can "do nothing". Theory is one thing, but we are only talking about $1000, and even that small amount of money was "reported under his dad's SSN".

So, IRS screens will be keying in on the dad's SSN and find no other income. My guess is IRS screens will not flash red and IRS will not deploy six IRS agents and a tactical squad. For what "might" amount to at most as maybe $200-ish dollars of tax revenue. Even if $333 each was ultimately "passed through" and reported on the three kids' returns, one might possibly be looking at "no" additional tax revenue due to bracket breaks, or at most maybe less than $200, maybe $100 total of all three kids combined.

For all the work needed to report it "per theory", not reporting it all is not major tax fraud, and not really beating Uncle Sam out of much if anything at all---except another pile of forms!

If, somehow, IRS screens did end up doing further processing on the $1000 and somehow relate his dad's SSN to an estate return filed with an EIN, IRS might just do correspondence, or might still decide---not worth it! Consider how far behind IRS has fallen in audit rates over the years, and consider how far behind they have fallen in even processing new year tax returns because of covid.

Both morally, and practically, I say--do nothing.

(Full disclosure---I am a retired CPA. Have not done anything for pay for almost 20 years. So, I am 20 years out-of-date on IRS practices. Except for what I read on IRS workload.)

 

[38Chevy454]

Thanks to all above for the opinions. I am certainly not wanting to open that estate tax can of worms and all the work associated. The big factor is that it was sent in my Dad's SSN, not the estate EIN, or my SSN. I'm going to do nothing, consider it like a life insurance payout, with no taxes due if I am ever questioned on it.


I have done for my parent's estate, and currently do prepare for a sister's irrevocable trust, tax returns. I don't need to unnecessarily add to my time req'd for taxes.

 

[audreyh1]

What a pain!

 

[RetireeRobert]

...The big factor is that it was sent in my Dad's SSN, not the estate EIN, or my SSN. I'm going to do nothing, consider it like a life insurance payout, with no taxes due if I am ever questioned on it....

"Let sleeping dogs lay" more often than not solves a lot of "practical" problems.

 

[gauss]

If I were you, I would consider this relatively simple strategy to resolve this.


#1) Prepare a check from your personal funds for $40 to the IRS

#2) Submit the check along with IRS Form 7004 - 'Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns'. I believe the form is quite simple. This will get you a few extra months to file your 1041 AND it will bring the tax balance due down to $0. This may help to avoid any possible interest/penalties that may be accessed down the road if you do nothing.

Be sure to use the EIN number (and name) of the estate, not your Dad's SSN.

Steps 1 and 2, above, which you should do now could be done in about 90 minutes.

#3) Consider following up with the actual 1041 later this year when you have more time.

No need to issue K1's to the other beneficiaries, and bring them into all of this, if you pay the $40 tax that is due with your own funds.

No need to go back to Probate Court to reopen the estate since you are still on the hook as far as the IRS is concerned (see the part about 'Responsible Party' on your SS-4 filing to get the original EIN, where your fathers SSN is intertwined with your own SSN. Note also that you received and signed the check.)

-gauss

p.s. Note that I come from this with the perspective of a volunteer tax preparer at the local Senior Center. My personal #1 goal there is to file the returns (correctly) so that the seniors do not receive a stressful IRS correspondence during the off-season when we are not there to help them.

 

[SecondCor521]

^ gauss, the 1041 for 2020 would just be due on 4/15, wouldn't it? The OP has another 2.5 months to file it, and if they don't do K-1s then the 1041 is really simple. No interest or penalties would be due if they file 1041 with a check for $40 by 4/15, because they meet the less than $1000 tax due safe harbor rule.

BTW, I agree it's easier than issuing 3 K-1s. I had a one track mind since that's how a trust I'm familiar with does things, and OP had already distributed the income. But yeah, just keeping all of the income in the estate tax return is simple. Plus, it uses up the estate's $600 tax exemption (Form 1041 line 21).

 

[sengsational]

Gauss has the right answer. But I'd ignore it and "pay the bill" if the IRS sends one. But that's just me. I'll admit that the heart rate elevates a bit when I see a letter from the IRS, but seconds later, when I see it's a bill for $50 or $100, I write a check and go about my day, unperturbed. The IRS and I have a long, long business relationship. I follow the rules to the best of my ability, but there are some things that would require more trouble and/or cost than I'm willing to expend. Considering the sums involved over a lifetime of taxation, one dribble that gives me an advantage or another mistake on my part that gives them the advantage isn't anything to fret over.

 

[SecondCor521]

The income retains it's character, so interest income to the estate that passes via a K-1 is reported as interest on the recipient's 1040. Ditto capital gains, tax exempt interest, etc.

I wanted to clarify what I wrote above because I have realized it could be misconstrued.

If a trust or estate receives income of a particular type, and then that income is distributed via a K-1 to a beneficiary, then that income is taxed to the beneficiary as whatever type it started out as.

So if a trust has long term capital gains and distributes them to a beneficiary on a K-1, the beneficiary would report it as a long-term capital gain.

If a trust has tax-free income and distributes it, then the beneficiary would report the income as tax-free.

And so on.

I'm fairly certain this is why there are a bunch of different boxes and codes on K-1s - it's so the various types and flavors of income can be communicated from the trust or estate to the recipients and be taxed properly.

(It is emphatically *not* the case that all estate or trust distributions become interest income on the beneficiary's tax return, which is how someone could interpret my "ditto" comment in the part of my post which I quoted above.)

 

[Taxman59]

From what the OP posted, it looks to be a reimbursement of previously unreimbursed medical expenses. That would leave me to believe that the reimbursement is NOT taxable income, and not reportable. If the settlement fund was making interest payments, it would report on a 1099-INT. Read the enclosures carefully, and in general, I would do nothing.

BTW, I retired from being a CPA and estate planner, but that is almost 6 years old and from another lifetime.

 

[audreyh1]

Yeah, if it was reimbursement for an overcharge, why ever would it cause a 1099-MISC unless there was interest paid on the amount reimbursed? The interest would be taxable, but can’t be enough to require tax return filing.

 

[38Chevy454]

I need to clarify what the base reason of the lawsuit was for. Reimbursement for medical expenses is not the right term in the sense it is being discussed here. What it was is that the retiree health care benefit was changed and that change caused an increase in retiree's medical expenses. So maybe my trying to shorten the long story in original post and question might have misled the discussion. It was for costs of medical expenses, but not as I seemed to have worded it implying a reimbursement like after you pay a co-pay and then insurance pays the bill, with whatever portion you may still need to pay. This was more related to initial employee cost of the insurance. Therefore the lawsuit reimbursement is more like back-pay to cover the costs that were supposed to be paid by the employer. I think that is why the 1099-MISC and the related income reporting. Hope that makes sense. At least it sounds logical to me.



I appreciate the help from everyone. I am still considering my plans of how to deal with this. All sides have compelling arguments as to what actions to take.

 

[Gill]

I think the answer to your question is more basic. I don't see how this even constitutes income. Accordingly, there is no need to report anything. BTW, I have a similar background as Taxman59.
Gill

 

[Gill]

I appreciate the help from everyone. I am still considering my plans of how to deal with this. All sides have compelling arguments as to what actions to take.

Several of us have told you this is not income. Don't report or do anything!
Gill

 

[RetireeRobert]

Several of us have told you this is not income. Don't report or do anything!
Gill

Yes, that makes three retired CPA's (two much more recently retired than me) saying don't file or do anything.

 

[pb4uski]

Make that 4 retired CPAs... though I was a corporate accounting type and not a tax guy... but I would ignore it. If it was for unpaid claims for medical expenses then if your dad had received that while he was alive it would not have been income. OTOH, not sure why they would send a 1099-MISC for it but I'd wait to see if they send you a bill.... if they do and it is a sensible amount then just pay it.

 

[RetireeRobert]

...... but I'd wait to see if they (IRS) send you a bill.... if they do and it is a sensible amount then just pay it.

Bingo!

I believe that would be a worst case scenario.

I am thinking most likely, nothing is ever heard again, due to the very small magnitude--if any--of possible tax revenue vs IRS cost of chasing it down through SSN of a now deceased person.

Let sleeping dogs lie (or is it lay) solves so many potential, but otherwise needless, problems.

 

[38Chevy454]

To follow up and close the loop on this, here is what I ended up deciding to do:
I filed a Form 1041 estate tax return as decedent's estate, with the $1000 income as the only income entry. I took the allowed $600 exemption, and coincidentally happened that the fiduciary fees were $400. So net income was zero, and zero tax due. So at least there is something to have on record if the IRS ever wonders why they received a copy of the original 1099-MISC.

 

[RetireeRobert]

Sounds good! My guess is that is the last you ever hear about it.