What is your liability as a fiduciary for estate or trust tax returns?

No authority exists in the Internal Revenue Code of 1986, as amended (the “Code”), the Treasury Regulations thereunder or case law that imposes a duty on a taxpayer to file an amended tax return to correct an error or omission on a previously filed tax return if the error or omission was made in good faith without fraud. So practically what should you do if you discover that you, as personal representative of an estate or trustee of a trust, have accidentally filed an erroneous federal tax return?

Your attorney would highly encourage you to discuss filing an amended return with the beneficiaries of the estate or trust to get their consent to file an amended return to correct the error. If all parties consent to the amended return, then you should file an amended return as soon as possible.

If all parties object to the amended return, then you should consider your own liability if the Internal Revenue Service (the “Service”) imposes a tax plus penalties and interest before the statute of limitations expires. If any beneficiary refuses to consent, then you should consider having your attorney petition the court for a court order providing direction.

What happens if the court will not provide an order directing you whether to file an amended return? It is not clear whether a beneficiary would be entitled to bring an action against you for either filing such amended return and increasing the taxes and interest owed by the estate or trust, or, if the estate or trust gets audited, the increased taxes, interest and penalties owed by the estate or trust.

Thus, you must ultimately decide whether the estate or trust should file an amended return. It is a good idea to discuss with your attorney having all beneficiaries of the estate or trust execute an agreement indemnifying you and holding you harmless for the decision to either file the amended return or not. This should protect you from future liability.

REMEMBER: Under Circular 230, your attorney is required to advise you of the non-compliance and to advise what the consequences are if the non-compliance is not corrected. There is no requirement to file such an amended estate tax return and your attorney cannot make this decision for you.