An estate’s executor or administrator, also know as a personal representative (“PR”), is personally liable for paying the decedent’s remaining tax bills, be they income taxes, gift taxes or estate taxes. See 31 U.S.C. §3713(b) and IRS Manual 126.96.36.199 (10-16-2007).
There are three risk-management tools every probate lawyer needs to know about and incorporate into his or her practice:
- IRS Form 56:
A Form 56 needs to be filed twice: when your PR first gets appoint to let the IRS know who your PR is and where to send all tax notices; and again when your PR finishes his job and is discharged. What you’re doing here is making sure that any correspondence from the IRS having to do with the decedent’s taxes gets to your PR right away; the last thing you want is your PR to get sued for failing to pay the decedent’s back taxes because the deficiency notices went to the wrong address. Also, the instructions to Form 56 state that the filing of a Form 56 when your PR is discharged will “relieve [the PR] of any further duty or liability as a fiduciary.”
- IRS Form 4810:
Not only do you want to make sure the IRS knows your PR exists and that this is the person they need to contact for all matters related to the decedent, you’ll also want to “shake the bushes” to make sure there are no unpaid back taxes involving the decedent. You do this by filing a Form 4810 (Request for Prompt Assessment for Income and Gift Taxes). A cautious PR will wait for the IRS to respond to this assessment request prior to making any distributions to the estate’s beneficiaries. You don’t want all the cash to go out the door only to be surprised by some huge tax assessment that puts your PR in the uncomfortable position of having to ask heirs to give money back to pay back taxes.
- IRS Form 5495:
At the same time your PR files a Form 4810, he’ll also want to simultaneously (but separately) file a Form 5495 (Request for Discharge from Personal Liability for Decedent’s Income and Gift Taxes). This is another way to make sure your PR gets the heads up on any of the decedent’s unpaid back taxes. If Form 5495 is properly filed, the IRS has nine months in which to notify the PR of any deficiency for the decedent’s applicable income or gift tax returns. If the PR pays the additional tax, or if no notice is received from the IRS within nine months from the date of filing Form 5495, the PR is then discharged from personal liability.