Executor of estate with unfiled tax returns?
An Executor’s job is overwhelming with many responsibilities. Among the first tasks an Executor should do is to verify if the decedent was up to date on his individual income tax returns, Form 1040. All outstanding tax returns should be filed, including one for the year in which the decedent passed away.
It’s absolutely critical that you file for all past years, for several good reasons
- The estate may incur interest and penalties for late filings
- The estate may lose a refund (you can claim a refund for up to three years after the return due date).
- The estate can deduct the balance due for prior taxes on the US Form 706 Estate Tax Return or on State estate tax returns
Steep penalties? Don’t Panic!
Was the decedent or his family member extremely ill or disabled? Did he suffer severe hardships due to natural disasters? If he didn’t file because of hardships, we at Urbach & Avraham, CPAs can assist you in requesting an abatement from the IRS of penalties imposed due to the late filing.
Review of prior years’ taxes
Careful review should be done of prior years’ tax returns. Executors should search for the following items:
- If returns were prepared by the individual who passed away when he was ill or elderly, these returns may have substantial mistakes or omissions and need to be amended
- The returns are a source of information about the assets of the decedents. They can be helpful in identifying bank and brokerage accounts and real estate holdings of the decedent.
- Most of the carry-forward losses and credits from a decedent’s final tax return do not carry over to the estate income tax returns. However, a few tax attributes do carry over, such as the basis in non-deductible IRAs from Form 8606. Some attributes carry over to the estate income tax returns and some to the beneficiaries’ own income tax returns.
Fiduciary income tax returns
The estate must also file Form 1041, Fiduciary Income Tax Return, for all years in which there was income in excess of $600. Income may be from interest, dividends, sales of securities, withdrawals from pension plans, or sale of real estate. If you as executor failed to file for several years, every effort should be made to catch up on delinquent filings. You may be held personally liable for late penalties imposed.
File It ASAP
As soon as you realize that there is a past-due tax return, you should prepare and file it.
If the estate doesn’t have the liquid cash to pay the balance when you file, you can ask for an additional 60-120 days to fulfill the financial obligation. If that’s not enough time and/or you’re going to need to pay in installments, you can apply for an IRS Payment Plan.
What If You Don’t File?
The IRS may file a substitute return for the decedent. If this happens, he may not get all of the deductions and credits that he should. We advise you to still file a tax return that includes everything, even if the IRS already prepared a substitute return. The IRS usually adjusts the return they created to reflect credits, deductions, and exemptions when they’re made aware of them.
The IRS will notify you if they file a substitute return. If you don’t’ file or submit a petition to Tax Court, the IRS will proceed with its proposed assessment, which will trigger a tax bill. Failure to pay it will result in the account going into the collection process. This can include the filing of a federal tax lien or a levy on the estate bank account.
If prior year information is required, we can assist you in obtaining IRS transcripts. These transcripts provide all sources of payors of wages, interest, dividends, pensions and proceeds from sale of securities and real estate.
At Urbach & Avraham, CPAS, we encourage you to contact us if you’re concerned about a return that wasn’t filed. We can help you understand what your options are and how to proceed. We can assist you in abating penalties and obtaining IRS Transcripts if necessary. We can also help with tax planning for the estate, so you don’t have to deal with a past-due return again.