Purpose: This IRM section provides information on probate proceedings and identifies the need for administrative or judicial action on decedent cases. Use the information in this section to guide you through probate proceedings and to evaluate and protect the government's interest during these proceedings.

Audience: The guidance in this IRM is specifically intended for revenue officers, advisors and managers, although other employees in SB/SE and in other functions may find them useful.

Policy Owner: Director, Collection Policy, SB/SE.

Program Owner: Collection Policy, SB/SE, Global Strategic Compliance.

Primary Stakeholders: SB/SE Collection and Chief Counsel.

Program Goals: When a taxpayer dies owing federal taxes, IRS employees must understand the progression of probate proceedings and the time-sensitive deadlines that must be met to protect the Government’s interests. They must also be aware of how to determine which expenses are allowable, the priority of the federal tax lien, and the differences between solvent and insolvent estates, as these factors influence the actions that must be taken. By following the procedures in this IRM, employees will understand these matters and how to correctly handle them.

This section provides the general steps taken in probate proceedings. These steps will vary based on state law and the type of administration (dependent or independent). Since laws vary from state to state you should conduct internet research on probate law for the state you work and check your local law guide.

Actions taken in probate proceedings are noted on a docket sheet. The docket sheet should be copied (or printed if available electronically) and added to your case file. The docket sheet will outline what has happened in the proceeding, such as orders, hearings, filings or motions.

Collection actions may continue during probate proceedings unless the assets are under the control of the court in a dependent, supervised or formal proceeding. The following IRM sections provide guidance concerning collection actions: IRM 5.5.1.5, Probate and Non-Probate Property, IRM 5.5.1.6, General Information on Probate Proceedings, and IRM 5.5.3, Working Decedent Cases, which has numerous pertinent sections.

Three forms are used to notify the estate administrator or the probate court of taxes due, they are:

Form 10492 is prepared by revenue officers and advisors to show the taxes accrued by the taxpayer prior to the taxpayer's death. This form also cautions administrators of potential personal liability if taxes are not paid. Generally state probate courts will not accept this form as a substitute for a creditor claim presented for payment. This form should be sent to the estate administrator or a successor administrator as soon as the Service learns who has authority over estate assets.

Form 4490 is a proof of claim. It is a written statement that sets forth a claim against the probate estate of a deceased debtor for tax liabilities accrued prior to death. This form is prepared and monitored by advisors. State statutes will specify if the claim should be filed with the court or mailed/presented to the estate administrator. Generally a proof of claim should be sent to the estate administrator and should also be filed with the court in all probate proceedings unless the local law guide specifies otherwise. IRM 5.5.4, Proof of Claim Procedures in Decedent Cases, provides further guidance on filing proofs of claim.

Form 2373 is used to show taxes that have accrued after the probate proceeding has commenced. Typically taxes reflected on this form result from estate income tax (Form 1041), payroll taxes for a business operated after death of the taxpayer or excise taxes. This form is filed with the court. IRM 5.5.2.6.1.1.1, Claiming Taxes as an Administrative Expense, provides guidance on use of this form.

The ICS history must be documented to reflect the date on which a form is sent to an estate administrator to establish when they were put on notice of taxes due. Consideration should be given to sending these forms by certified mail and a copy should be maintained with the case file.

If a successor administrator is appointed, notice of taxes due must be sent to make the new administrator aware of the outstanding tax liability or unfiled returns. If notice was sent to the prior administrator send a copy of that notice to the successor administrator.

If a Notice of Federal Tax Lien (NFTL) has been recorded against a taxpayer during their lifetime, its priority is preserved after death and valid against other creditors (except as provided in IRC section 6323), including future beneficiaries whose claims come into existence subsequent to the Federal tax lien (they are debts of the estate).

The death of the debtor does not extinguish the federal tax lien, nor affect the priority among multiple security interests in the debtor's property.

Federal law controls in situations in which a federal tax lien competes with any interest under state law or by contract. However, the Service may in its discretion not assert priority of its federal tax lien over reasonable administrative expenses of the estate, to the extent that such expenses are not covered by an insurance policy, trust or other similar benefit that covers the cost of administrative expenses of the estate. State statutes may limit the amount of reasonable administrative expenses permitted to be paid during probate.

A state statute may not subordinate a federal tax lien to interests that Congress has not specifically permitted to prime the lien. State law is nullified to the extent that it conflicts with federal law.

IRC 6323(a) provides that specific valid liens on the decedent's property that were fully perfected prior to the NFTL will have priority.

When an issue arises concerning priority of the federal tax lien, particularly in a court proceeding, consult with Area Counsel. For further guidance on referrals see IRM 5.5.2.10, Referral to Area Counsel for Judicial Action.

For additional guidance on federal tax lien preparation, filing and attachment see IRM 5.5.3.6, Notice of Federal Tax Lien.

A solvent estate is one in which the value of estate assets exceeds the estate's debts.

An insolvent estate is one that has insufficient assets or equity in assets to cover its debt. A no asset estate is a type of insolvent estate from which there is nothing to collect. Although there may be assets in this type of insolvent estate, the assets have little or no equity. If there actually are no assets then it is unlikely there is a need for a probate proceeding.

Insolvent estate is a broadly used term. Some documents use the term insolvent estate to refer to estates that cannot pay all claims presented. After priority claims are paid the estate is then insolvent to pay the full amount of all other (lower priority) claims. For this reason it is very important that notices of proposed distribution are carefully reviewed to make sure a federal tax claim is in the proper payment category. If the federal tax claim is not in the proper payment category Counsel should be consulted on judicial action necessary to ensure payment. Review federal law concerning priority of federal and state taxes.

Creditors within a given class or category are paid on a pro rata basis when there is not enough money to pay all of the creditors in that class or category.

Before any money can be distributed to beneficiaries all the debts of the deceased must be paid, including the funeral bill, any medical bills, taxes and credit cards. This might require the sale of assets if the deceased did not set aside enough to cover all debts.

A declining real estate and securities market may impact the administration of probate estates. An estate administrator may discover that an estate that was solvent at inception has suddenly become insolvent. In such case, the administrator may need to act swiftly to properly administer and settle the estate to avoid potential personal liability.

Expenses related to the decedent's estate are known as administrative expenses. They include any expenses related to maintenance of the decedent's property incurred after the decedent's death. Expenses are paid from the estate before assets are distributed to the beneficiaries or heirs.

The Service in its discretion may permit reasonable, necessary expenses to be paid before a federal tax lien. Such expenses must be examined to determine if an expense is reasonable and necessary to the administration of the estate. Reasonable and necessary expenses should not be permitted ahead of a tax lien if such expenses are already covered by an insurance policy, trust or other similar benefit that covers such costs. State statutes may limit the amount permitted to be paid for administrative expenses in probate. Inform the administrator that such planned expense payments may not be made prior to tax payments. Contact Area Counsel if an administrator refuses to pay a tax lien. For more information see IRM 5.5.2.4, Priority of the Federal Tax Lien, and IRM 5.5.2.10, Referral to Area Counsel for Judicial Action.

The major expenses of probate include:

The estate administrator must carefully examine the accuracy and validity of claims/expenses submitted and, if appropriate compromise and settle such administrative expense claims.

In accordance with state law, claims and expenses are categorized for priority in which they will be paid. For federal tax claims, federal law controls the priority of payments of federal tax liens. To the extent there is a conflict between state and federal law, federal law controls. Contact Area Counsel for guidance.

Life insurance is a contract between the insurer and the policy owner whereby a benefit is paid to the designated beneficiary if an insured event (death) occurs which is covered by the policy.

The beneficiary is designated in the policy contract and could be any of the following:

Burial policies cover funeral expenses, such as mortuary expenses, casket, cemetery plot, paying off debt, the cost of administering probate or medical bills. The policy may cover specific products and services, or it may be written to make a lump sum payment to pay associated expenses. Secure a copy of the policy to determine coverage.

Quite often the IRS gets involved after these expenses are paid. Ensure these expenses or reimbursement of these expenses are not allowed ahead of payment of federal taxes accruing before death. Employees must inquire about insurance policies, trusts, or other similar benefits that cover administrative expenses, as well as state statutes that limit the amount permitted to be paid for administrative expenses in probate.

Internal research can be performed to see if a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., were issued to a beneficiary. Beneficiaries may be identified by a will, obituary, documents that reflect payable on death designations, such as signature cards on bank accounts, term documents of certificates of deposit, or a Form 712, Life Insurance Statement.

If the decedent was a veteran, expenses may have been paid by the Veteran's Administration as part of burial and memorial benefits. Information concerning burial benefits for veterans can be researched under the VA benefits and healthcare tab at www.VA.gov.

An asset that has a beneficiary designation (such as a retirement account, a life insurance policy or a payable on death account) is not controlled by a will. Beneficiary designations will take precedence over the will. This type of account or policy won't have to go through probate.

An account or policy may have multiple beneficiaries designated. The primary beneficiary or beneficiaries inherit first. If they are dead or they die with the owner of the account or policy, the assets go to any secondary beneficiaries that have been designated.

If all of the transfer on death beneficiaries predecease the deceased owner, the proceeds may pass to the estate and become probate property, to be distributed in accordance with state probate law or the will. Area Counsel should be consulted in this type of circumstance before collection action is taken against the asset.

In some proceedings the estate administrator will be required to post bond. A probate bond is a bond issued on the performance of an administrator. Its purpose is to protect heirs and creditors from being harmed by the negligence or malfeasance of the administrator. It is like an insurance policy. Obtaining a probate bond can be costly and the cost depends on the value of the property subject to the bond.

Requirements for a bond will be reflected in documents such as:

If during probate proceedings the estate administrator requests that the bond amount be reduced, advisors should determine if the IRS debt has been acknowledged and whether the proposed reduced amount is of an adequate amount to pay all taxes due if necessary.

Probate bonds are a potential collection source in the event of administrator negligence or malfeasance. In this case, consult Area Counsel for advice as to how to file a claim in probate court to enforce liability on the probate bond. Be aware that generally a bond will be terminated after the estate proceedings are officially closed. If an estate proceeding has officially closed, consult Area Counsel.

The Service would have to authorize Department of Justice to make a claim on a bond, just like any other collection suit. See IRM 34.6.2.10.1, Action on Bonds.

There will be circumstances when administrative actions are impractical or ineffective and a referral should be sent to Area Counsel to consider judicial action to maximize collection efforts. A referral or memorandum should outline facts of the case, issues in question, include the docket sheet, a complete history transcript, and all related documentation/correspondence that will assist in decision making on the issue referred.

See IRM 25.3.2, Litigation and Judgments - Suits by the United States, for information regarding requests for legal action against a taxpayer to collect unpaid taxes.

Depending on the issue involved, the following factors may need to be addressed when making a referral:

Should you come across any of the following situations notify Area Counsel and make an expeditious referral as they may have a short time frame to respond to the court:

A decedent’s estate or trust is a separate legal entity for federal tax purposes. Every estate or trust that is required to file Form 1041, United States Income Tax Return for Estates and Trusts, must have an EIN.

The estate administrator or fiduciary of a decedent’s estate or trust uses Form 1041 to report:

Refer to the instructions for Form 1041 for information regarding filing requirements, filing dates, estimated tax payments and income reported on various schedules.

Your compliance check should include verification if the estate is required to file Form 1041. If the Form 1041 has been filed it should be reviewed to determine income and assets of the estate or trust. Cross reference EIN’s should be input to ICS.

Income and assets are reported on the first page of the Form 1041 on lines 1 through 9, you will find various types of income paid to the estate (interest, dividends, business income, rents, etc.).

The Schedule C, Profit or Loss from Business, provides information such as type of business, income and expenses deducted for assets owned.

The Schedule K-1 is used to report the beneficiary’s share of the estate or trust. It gives names and SSN’s, which is helpful if they need to be contacted concerning distributions received. The amounts on the K-1’s will flow to the beneficiaries individual Forms 1040.

Be aware that the amount of interest the taxpayer receives depends on the type of investment, interest rate and length of investment. Determine the length of time required to earn the amounts reported. You may discover that an amount initially thought to be nominal is in fact worth pursuing. The amount could have been earned over a short period of time, while the estate was looking for somewhere else to invest money.

IRM 21.7.4.4, Income/Information Returns Research, contains information and adjustment procedures for income tax returns.

Tax liability can be forgiven, or refunded if already paid, if while on active duty, a member of the U.S. Armed Forces dies in a combat zone, or from wounds, disease or injury incurred during active service in a combat zone.

This forgiveness applies to the year the death occurred, as well as any earlier tax year that ended after the member entered the combat zone.

Tax liability can be forgiven, or refunded if already paid, if a member of the U.S. Armed Forces dies from wounds or injury incurred in a terroristic or military action.

This forgiveness applies to the year the death occurred, as well as any earlier tax year beginning with the year before the year in which the wounds or injury occurred.

See IRC section 692 , Income taxes of members of Armed Forces, astronauts, and victims of certain terrorist attacks on death.