Who Pays for a Deceased's Overdue Income Tax?
When taxpayers die without paying their tax liabilities, their estates are required to pay their tax bills, in addition to paying estate taxes for property transferred under the federal estate tax laws. Additionally, state tax agencies can also require estates to pay estate and inheritance taxes. According to the federal Internal Revenue Code, executors or personal representatives of taxpayers' estates are personally liable for paying any unpaid federal income taxes and other unpaid debts from the estates' gross proceeds.
Estate Administration Procedures
Once a taxpayer dies, his estate conducts a general tax accounting and valuation of all of his estate's assets, including personal and real property, investment property, trusts and life insurance proceeds. An administrator, executor or personal representative of the decedent's estate is required to apply for a federal EIN or employer identification number on behalf of the estate and must timely file all outstanding tax liabilities and the decedent's final tax return. The federal government recommends that personal representatives hire professional tax accountants or attorneys if they are responsible for administering estates valued at more than $1 million.
Estate Tax Forms
Under the Internal Revenue Code, estates are taxed separately from decedents. As such, an estate is required to file an IRS Form 1041, while a decedent was required to file a Form 1040. Estates pay income taxes on the gross proceeds owned by decedents at the time of their deaths. According to the IRS, each estate must file a Form 1041 if the gross income of the estate is valued at $600 or more annually and until the estate is discharged. However, international beneficiaries are subject to different tax rules, and executors must file annual Form 1041 returns even when the gross income of their estates does not exceed the $600 annual threshold.
Tax Forgiveness and Extensions of Time
According to the IRS Publication 559, the federal government has the discretion to forgive a decedent's unpaid income taxes if she died while in combat, during an act of terrorism, while detained as a prisoner of war or while serving as an astronaut. If the IRS grants an estate's application for forgiveness of past due taxes, it will forgive only the part of the tax debts that arose during active military duty or active aeronautical duty.
When administrators are unable to pay income taxes within the time set forth by the IRS, they must submit IRS Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. The IRS generally grants executors a six-month extension to file a tax return but requires them to pay all taxes currently due to avoid associated interest and late filing penalties.
Considerations
Because tax laws can frequently change, do not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your state.
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