3rd Oct 2014
Being an executor for an estate can be especially difficult when the deceased leaves behind debts. Worse, when those debts are bigger than the size of the estate. Even worse when those debts involve taxes from returns filed before the death and actions that the deceased took while they were alive. The executor often has little information to contest a tax liability and can feel trapped between the debt and the beneficiaries. But what needs to be clear to the executor is that tax liabilities cannot be ignored.
The recently decided case of United States v. Reitano (USDC Civ. Act. No. 12-11944-RWZ) serves as a reminder that ignoring those come not only at the peril of the estate, but to the executor as well. Mr. Reitano died owing a large tax liability. In addition, he owned stock in two commercial fishing boats. After Mr. Reitano’s death, the IRS tried to work with the executor, Ms. McNicol but she would not come to a settlement of any sort. In fact, at some point during those negotiations, she transferred all of the stock in the boats to herself as the sole heir of the estate. When the IRS sued for collection, they found the assets gone and went after Ms. McNicol. The executor claimed that the assets were transferred to pay for funeral expenses, administrative expenses, and family allowances (homestead, etc.) that all get paid before taxes under the Federal Priority Statute. The problem was she had no evidence to show any of the distributions was used for anything but her personal use and an attempt to avoid paying the taxes. So the tax court held her personally liable for the payment of Mr. Reitano’s taxes. Consider also that Mr. Reitano died in 2002 and the transfers were done in 2002 and 2003. That is over a decade ago and still the IRS gets to go after Ms. McNicol. The interest and penalties must be astronomical by now. No one wants to find themselves in this position.
Ms. McNicol’s biggest mistakes were in presuming the IRS would not take action against the estate and more importantly, not go after her once the stock had been transferred. It is not uncommon for tax attorneys to be asked, “Well what if I just ignore it, will the IRS come after me? No one can say for sure when the IRS will pursue a debt and when they will declare it uncollectible. What is sure is that IRS regularly goes after assets from owing taxpayers. You do not want to be in the position of having given away those assets and being the one who was responsible for paying for them. That puts you, like Ms. McNicol, in a position of personal liability. Even if Ms. McNicol had given the assets to another beneficiary, then she could be held personally liable and the other beneficiary could also be subject to a seizure action by the IRS. An executor in this situation could also face criminal fraud charges at the federal and state levels as well. Now that certainly is a place no one wants to be!
Getting legal advice at the first notice of a tax issue and addressing it are important. Losing the assets to the tax debt are less traumatic than a long drawn out court process which results in losing the assets plus your legal fees and possibly your freedom. Just because the taxpayer is deceased, the tax liability does not go away. If you are in charge of an estate and get an IRS or state tax notice, seek legal counsel as soon as possible. Don’t be Ms. McNicol and have decades of penalties and interest to pay!
Notice the Notice and seek advice! Do not wait until penalties and interest have you paying twice!