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Late estate tax returns may carry penalties

Pennsylvania residents may be interested in a recent case that could affect taxpayers throughout the country. On June 10, the U.S. Court of Appeals for the Federal Circuit held that the penalty assessed when an estate tax return is filed after the deadline is mandatory.

The case began in 2003, when a man died leaving his son as the executor of his estate. The son was a lawyer and his former legal partner assisted him in distributing the estate. When a person dies, an estate tax return must be filed within nine months. However, the IRS can grant a six-month extension. The executor of the man's estate filed for and received an extension because of two unresolved legal issues that arose during the estate administration. These issues needed to be resolved before the taxes due could be determined. When the legal dispute continued, the executor sent an estimated tax payment of $877,300, which he believed sufficient to cover taxes owed. The executor did not file a tax return with the estimated payment, mistakenly relying on a lawyer's advice that it could be filed later.

Twenty-three months later, the legal issues were resolved and the executor filed a tax return, requesting a $198,727.75 refund. The IRS did not disagree with the tax calculations, but assessed a penalty of $169,643.06 for filing the return late. The U.S. Court of Federal Claims found that the penalty was permitted, and its decision was upheld by the U.S. Court of Appeals for the Federal Circuit.

This story illustrates the importance of competent legal representation, even for those with some familiarity with the law. Mistakes made when distributing an estate could be costly. An estate planning and administration lawyer may be able to help avoid those mistakes and help look for ways to reduce tax liability.

Source: Wealth Management, "Mandatory Penalties for Late Returns", Dawn S. Markowitz, June 11, 2014

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