You are Acting as a Personal Representative. Does the IRS need to Know?
If you act as a Personal Representative (PR) one of your duties is to make sure that all taxes have been filed and will be filed. Unless very close to the decedent, most PRs have little idea of the decedent’s tax situation and have no idea whether the decedent owes taxes, has a lien or a deficiency. So how does a PR get “in the loop” with the IRS to gather that information?
The PR should always file an Internal Revenue Service (“IRS”) Form 56, Notice Concerning Fiduciary Relationship, with the“IRS”. Treasury Regulations § 301.6903-1(a) and (b) state that “….a fiduciary is required to give notice in writing to the IRS that he or she is acting as a fiduciary for the decedent and notice must be mailed where the decedent is required to file tax returns.” IRS Form 56 satisfies this requirement. If Form 56 is not filed and the IRS sends a Notice of Deficiency (“NOD”) to the decedent’s last known address (which could be the decedent’s home which may have been sold), a tax deficiency and tax lien could be asserted with no ability to object even though the PR may have never received the NOD. A best practice is to mail the originally executed Form 56 with a cover letter via certified mail to the appropriate IRS office. Once this return is filed, then the PR will receive notices from the IRS.
If you cannot locate the decedent’s prior filed returns, then you can file a Form 4506 to obtain copies of the last 3 years returns. The PR will also be receiving 1099s, etc to help them complete the decedent’s final year tax return. Once you have received and filed all the appropriate tax returns, then how do you terminate the PR’s relationship with the IRS?
Until a couple of years ago, there was a second IRS Form 56 that terminated the relationship, but that form has since been deleted from the IRS website. So how does one notify the IRS that the fiduciary relationship has been terminated? Do you have to do anything it all?
Internal Revenue Code (“I.R.C.”) § 6903(a) states “….a fiduciary shall assume the powers, rights, duties and privileges…until notice is given that the fiduciary relationship capacity has terminated.” Notice of termination should be given to the IRS to relieve the personal representative or trustee from any liability for any further actions.
But now that the termination Form 56 no longer exists, does that mean notice is no longer required? If you contact the IRS and an agent tells you that nothing else needs to be done, is that verbal communication sufficient in future liability actions? The prudent PR will want to do more. When the fiduciary relationship is completed, the best practice for terminating the relationship is to mail to the IRS a copy of the original Form 56 and write “TERMINATION NOTICE” at the top and write either “PERSONAL REPRESENTATIVE HAS BEEN DISCHARGED BY COURT” OR “TRUST IS TERMINATED” and mail to the appropriate address as mentioned above.
Finally, do not confuse this termination process with the need to file IRS Form 5495. Form 5495 releases the fiduciary from personal liability. Form 5495 should still be filed but the IRS has not officially confirmed that it satisfies the requirement for a termination notice of the fiduciary relationship. This is important because, even though the personal representative may be discharged from personal liability, the IRS has 9 months to assess any taxes from an estate and without proper notice, the IRS could assess deficiencies against the personal representative in his or her fiduciary capacity.
Advice: If you do not regularly file Form 56 or 5495…you are not alone but start now! Also, attorneys and PRs should add IRS Form 56 to the beginning and end of probate and trust administration checklists to protect PRs and ensure proper communications with the IRS.
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