** This article has been revised from its original version which was published on June…
Have you ever heard the phrase, “nothing is certain in life except death and taxes”? Notice that the phrase does not include “interest and penalties.” That’s probably because they are not always a certainty.
When someone passes away there are three types of taxes that may be relevant: (1) the decedent’s final individual income tax return, (2) estate tax return, and (3) fiduciary income tax return.
- The decedent’s final individual income tax returns are the tax returns that report the income earned by the decedent from the beginning of the calendar year to the date of his or her death.
- The estate tax return reports the value of all the decedent’s assets that are included in his or her taxable estate as of the date of the decedent’s death, (the 2015 Federal exemption is $5,430,000; New York State estate tax exemption from April 1, 2014 – March 31, 2015 is $2, 062,500, and the New York State Estate Tax from April 1, 2015 – March 31, 2016$3,125,000).
- The fiduciary income tax returns are filed by a fiduciary and must report income and capital gains and/or losses earned by the estate from the date of the decedent’s death until the end of either the fiscal year or calendar year, depending on what type of tax year is elected. If you are a trustee of a trust then depending on the terms of the trust and the income earned by it, then you may need to file a fiduciary income tax return as well.
If any of these tax returns are filed late without a request to file them late granted by the appropriate taxing authority (Internal Revenue Service for the federal tax returns, and the New York State Department of Taxation and Finance for the New York State tax returns), then there may be penalties and interest assessed. Likewise, unless the taxing authority has granted an approval, if there is a tax liability owed and it is not paid in a timely manner then there may be interest and penalties assessed.
The amount of interest and penalties assessed will depend on the type of tax return, amount of tax liability and the timeframe from which the tax liability was originally owed until it was paid. Depending on the facts and circumstances, the interest and penalties assessed could be a few hundred dollars or a few million dollars.
If you have received a notice and demand of tax due from either the IRS or the New York State Department of Taxation and Finance, then you should carefully read the notice and consider your rights as a taxpayer. If you feel that the tax assessed or penalties and interest assessed are incorrect then you can appeal the decision. However, if you believe the tax liability, penalties and/or interest assessed are correct but you have good reason for not filing the tax return or paying the tax liability in a timely manner, then you should consider writing a letter to the tax authority explaining your situation and requesting an abatement of interest and penalties.
When deciding whether to request an abatement of interest and/or penalties, or how to request the abatement, it is important to consider all of the facts and circumstances. For example, there may have been issues faced when administering your loved ones estate that would cause a delay, the fiduciary may have medical or personal issues that made it impossible to handle the affairs of the estate, no one may have had the authority to gather the appropriate information to file the tax return in a timely manner, or there may not have been liquid assets to pay the tax liability.
If there are interest and penalties assessed then you should discuss the options with a qualified professional who can analyze the situation and help craft your abatement request. It will be up to the tax authorities to grant the abatement or not, but it is definitely worth making the request if you have good cause.
By Eric J. Einhart, Esq. – Guest Blogger