How do you file back taxes for someone who is deceased?

March 21, 2022 by Jean Lee Scherkey, EA
tax written in blocks with money bags in the background

Whether a spouse, parent, sibling, distant relative, or friend, saying farewell to someone who has passed is never easy. It takes time to mourn, remember, and move forward. Adding the responsibility of settling a loved one’s financial affairs, including preparing any income tax returns still due, makes the mourning process all the more daunting. You may be tempted to forget about the looming tax issues, hoping the IRS will go away. But if the task to settle the final affairs for your loved one or friend has been laid at your feet, you know you have an obligation to resolve any lingering tax issues.

As the person wrapping up your loved one’s financial affairs, you know at the very least you will need to file their final individual income tax return. While thumbing through their mail and the papers they left on the kitchen table, you stumble across three letters from the IRS. Each letter is an IRS Notice CP2566 - one for 2016, 2017, and 2018. The first line of the letter states your loved one had not filed income tax returns for those years, and the IRS is about to assess a considerable amount of tax each year. After returning your leaping heart into your chest, your legs begin to feel like rubber bands, so you sit down and reach for your phone. Surely one quick phone call to the IRS letting them know your loved one is deceased will be the end of it, and the returns will not need to be filed, right? Before picking up the phone and making that “quick phone call” (due to the coronavirus pandemic, reaching the IRS by phone can take hours), read on to save yourself hours of frustration.

Usually, the person who has been appointed to settle a deceased person’s financial affairs (often referred to as the estate administrator) is required to file any outstanding income tax returns where the filing requirement was met. For years the loved one was not required to file because their income did not reach the threshold, and there was no other reason they needed to file, then an income tax return is usually not required. Unless your loved one does not have a filing requirement, the IRS and state tax agencies will be expecting the returns to be submitted. If returns are not submitted, the IRS and state tax agencies may prepare a return on your loved one’s behalf and assess the tax that is due, including penalties and interest. Returns prepared by the IRS or a state tax agency on behalf of a taxpayer are known as Substitute for Returns. It is not uncommon for the tax assessed on a substitute for return to be higher than if the taxpayer or their representative prepared the return. This is because the IRS does not consider certain itemized deductions, credits, or adjustments to income the taxpayer may be entitled to.

So, how do you begin? You knew filing the final return would be rough, and now you have several years to contend with. As you go through the shoeboxes of papers scattered around your loved one’s home, you find a W-2 from 2017 and a 2016 Form 1099-INT showing interest income. Thinking this may not be as Herculean a task to file these returns as you thought, you continue to search. Soon reality hits, and you excavate several Forms 1099-C, Cancellation of Debt, for 2016 and 2017. Next, you find transaction records that show your loved one began dabbling in bitcoin in 2018.

When filing back taxes, you want to include all the income that has been reported to the IRS. How do you know you have all the information to file? The first thing you want to do when preparing delinquent tax returns for someone deceased is to contact the IRS and request Wage & Income Transcripts and Account Transcripts for each tax year that needs to be filed. IRS transcripts can be obtained by submitting IRS Form 4506-T, Request for Copy of Tax Return. Because you are not the taxpayer, the IRS will not disclose this information unless documentation is included with Form 4506 that verifies you are authorized to receive information about your loved one. The IRS will need the following documentation to verify they are permitted to provide you with transcripts and any other information needed to complete the delinquent returns:

 

  • The taxpayer’s complete name (as it appears on their Social Security card), the address they lived at before passing, and their Social Security number, and
  • A copy of the death certificate, and either
  • A copy of Letters Testamentary approved by the probate court, or
  • IRS Form 56, Notice Concerning Fiduciary Relationship, if there is no probate proceeding.

Form 56 informs the IRS that you have the authority to act on behalf of the deceased taxpayer. You will want to read the instructions carefully to ensure the form is filled out correctly and any required documentation proving your authority is attached.

Remember, you will also need to contact any state tax agencies where returns need to be filed to obtain state income tax withholding amounts and any other information that will aid in the preparation of the state return. Knowing what state withholding or payments were made may benefit the federal income tax returns as these payments may be claimed as an itemized deduction.

In addition to requesting Wage and Income transcripts, you may also need to request a copy of the last income tax return your loved one filed if you cannot find copies among their paperwork. The return may provide valuable information about the types of deductions the taxpayer claimed and any credit carryovers, capital loss carryovers, or net operating loss carryovers that may be claimed on one or more of the back tax returns. This information may help tip the scales and turn a balance due into a refund.

As the person taking care of your loved one’s affairs, beneficiaries of the money and assets left may come knocking at your door faster than you would like and pressure you to make distributions. If it turns out income tax is due, and the money and assets have been distributed, you could find yourself in a precarious pickle. As the administrator, if enough funds were not set aside before distributions were made, you could end up holding the bag and be required to pay the tax due. You could try to go back to the beneficiaries and ask them to return some or all the money to pay the tax, but they may not be so inclined to oblige. Because of all the complexities that come with administering an estate, obtaining the advice of an estate attorney may be wise.

In addition to getting advice from an estate attorney, acquiring the best tax representation to help guide you through preparing and submitting delinquent returns and getting help negotiating penalty abatement on taxes due is vital. Generally, the IRS issues Notice CP2566 because they believe the taxpayer owes income tax for that year, and the amount could be daunting and part of the reason why the taxpayer did not file the returns in the first place. Having tax professionals in your corner with years of experience who understand the complexities of resolving tax debt provides much-needed relief during an already stressful time. The qualified tax professionals at TaxAudit Tax Debt Relief will walk with you, so you do not have to face the IRS alone. They will explain each step and provide honest answers, so you have the best outcome possible. With their free, no-obligation consultation, you have nothing to lose and peace of mind to gain.

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Jean Lee Scherkey, EA
Learning Content Developer

 

Jean Lee Scherkey began her career at TaxAudit in 2015, and her current title is Learning Content Developer. She became an Enrolled Agent in 2005. For several years, Jean owned a successful tax practice that specialized in individual, California and trust taxation, and assisting those impacted by tax identity theft. With over fifteen years of varied experience in the field of taxation, Jean has worked at different private tax firms as a Staff Practitioner, Tax Analyst, and Researcher. Before coming to TaxAudit, she worked over two years for TurboTax as an “Ask the Tax Expert.” In addition to her work in TaxAudit’s Learning and Development Department, Jean is actively involved in the company’s ENGAGE Volunteer Program, which provides opportunities for employees to help and serve the local community.  


 

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