Help with Amending Taxes for Deceased Relative - Possible to appeal penalties ??

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Sandwich
Posts: 39
Joined: Thu Jul 21, 2016 8:04 pm

Help with Amending Taxes for Deceased Relative - Possible to appeal penalties ??

Post by Sandwich » Sat Nov 16, 2019 12:46 pm

Hi Bogleheads,

I am seeking the wisdom of the crowd with this set of questions.

I have a recently deceased elderly relative (has a surviving spouse) who erroneously took a rental loss on 2017 and 2018 federal income tax forms. Underpayment of $ 3,000+ for 2017 and $ 2,000+ for 2018. (Plan to amend state tax forms as well and luckily the impact is minor ... under $ 100 for each year.)

I will advise the surviving spouse to make a large 4th quarter estimated federal income tax payment to mitigate the 2019 shortfall (having assumed that rental loss would continue for 2019) for 2019.

2020 and going forward, will advise surviving spouse to not consider rental loss at all.

(My deceased relative will have a decedent trust so I do not want to have the IRS come back years later with a large hit of years and years of interest and penalties.)

I am under the impression that 5% (?) interest will apply to the underpayments / under estimated taxes for 2017, 2018, and 2019.

Is there any way to appeal to the IRS to forgo penalties ?

I would appeal based on --

1. The error of the deceased who was in failing health when the 2017 and 2018 were filed. Surviving spouse signed join return but has little knowledge of tax rules.

2. Attempt is being made "early" on to pay the shortfall of 2017, 2018, and 2019 taxes ... i.e., not waiting for the IRS to audit.

3. 2016 federal income tax was $ 25,000+. 2017 federal income tax should have been $ 22,000+ instead of $ 19,000+.

4. I am an AARP Tax-Aide volunteer and just found the extent of the error upon the death of relative.

I would appreciate perspectives on what can be done.

Regards ....

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dodecahedron
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Re: Help with Amending Taxes for Deceased Relative - Possible to appeal penalties ??

Post by dodecahedron » Sat Nov 16, 2019 1:08 pm

Yes, there are definitely ways to appeal. The IRS has something called a First Time Abatement. There are also other avenues for pursuing abatement.

That said, given the complexities of the issues involved (rental losses, decedent trust), it would be penny-wise and pound foolish to try to do-it-yourself. If I were you, I would find the surviving spouse very reputable experienced professional help to straighten this matter out thoroughly before writing a very a carefully worded abatement request letter.

A Low Income Taxpayer Clinic at a nearby law school is the first place I would look to, given the income of the surviving spouse. I just re-read the OP and realized the household is/was not low income as the tax liabilities in question are quite large. Find a Circular 230 tax professional (attorney, CPA, or Enrolled Agent) with experience in handling this kind of tax issue.

Edited to add: both interest AND penalties will generally apply in situations such as you describe. The IRS can abate penalties (for reasonable cause due to mitigating factors such as you describe) but they can´t abate interest due on underpayments. Interest rates have varied in recent years. They are reset by the IRS every quarter based on a formula (Fed funds rate plus 3%). Here is a table showing the rates. They have been as high as 6% in some recent quarters.

MarkNYC
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Joined: Mon May 05, 2008 7:58 pm

Re: Help with Amending Taxes for Deceased Relative - Possible to appeal penalties ??

Post by MarkNYC » Sat Nov 16, 2019 1:31 pm

The IRS will assess interest on the additional federal tax due for 2017 and 2018, but there should be no penalty assessment in this situation unless the additional tax is not paid with the amended returns and the additional tax remains unpaid for more than 21 calendar days after the IRS issues a notice and demand for payment.

CRTR
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Joined: Sat Apr 11, 2015 1:15 pm

Re: Help with Amending Taxes for Deceased Relative - Possible to appeal penalties ??

Post by CRTR » Sat Nov 16, 2019 2:12 pm

Not sure things are the same today but here is my experience. I took over tax filing duties for my now deceased father ~10 years ago due his to Alzheimer's disease. At that time, I discovered overdue taxes and fees dating back 4+ years (total >$22000), multiple collection notices, etc, etc etc. The situation was a complete disaster. I called the IRS hotline and threw myself at their mercy. I just wanted to clear up the mess as quickly and as efficiently as possible. The agent on the phone was super nice and understanding. She waived ALL interest and penalties. She made sure that I wrote down her ID # in case anything else came down the pipeline. I have to say it was one of the nicest and best customer service experiences I've ever had . . .anywhere! So, my advice, is just call them up, explain the situation, be nice, act innocent and ignorant and see what happens . . .

Good luck!

MarkNYC
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Joined: Mon May 05, 2008 7:58 pm

Re: Help with Amending Taxes for Deceased Relative - Possible to appeal penalties ??

Post by MarkNYC » Sat Nov 16, 2019 6:06 pm

Sandwich wrote:
Sat Nov 16, 2019 12:46 pm

I have a recently deceased elderly relative (has a surviving spouse) who erroneously took a rental loss on 2017 and 2018 federal income tax forms. Underpayment of $ 3,000+ for 2017 and $ 2,000+ for 2018. (Plan to amend state tax forms as well and luckily the impact is minor ... under $ 100 for each year.)...

I am under the impression that 5% (?) interest will apply to the underpayments / under estimated taxes for 2017, 2018, and 2019.

Is there any way to appeal to the IRS to forgo penalties ?
There is a widely-held belief that when additional federal tax is due, either on an amended return or resulting from an IRS CP2000 tax notice for unreported income, that a late-payment penalty will be assessed in addition to tax and interest. This is not correct. Under Code Sec. 6652, a late-payment penalty of 1/2% per month applies to the late payment of "the amount of tax as shown" on the original tax return. The penalty does not apply to additional tax unless the additional tax remains unpaid for a period of time after actual assessment. The more severe late-filing penalty of 5% per month applies to "the amount of tax required to be shown" on the tax return.

If the IRS uncovers unreported income or other significant change to the original tax return that results in additional tax that exceeds the greater of (1) $5,000 or (2) 10% of the corrected actual tax, then a 20% accuracy-related penalty will be assessed. If the taxpayer proactively files an amended return to report and pay this additional tax, the 20% penalty will generally not be assessed.

mkalman
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Joined: Sat Sep 07, 2019 9:33 pm

Re: Help with Amending Taxes for Deceased Relative - Possible to appeal penalties ??

Post by mkalman » Sat Nov 16, 2019 6:21 pm

I have amended taxes several times for self-reported changes. In cases where there was additional tax due I sent the payment before or with the amended return (note: I believe the payment must be applied to the specific tax year being amended, not the current tax year) I sent an additional amount which would cover any possible interest and penalties. The IRS assessed the additional tax and interest up to the date of payment and refunded the remaining balance by check, and then later paid me interest on the refunded balance. They have never assessed a penalty on my self-reported amended returns.

All in all I found them quite pleasant to deal with in regard to amending self-reported additional tax due particularly for complex issues. It did take a long time to process the return and receive the refund.

Topic Author
Sandwich
Posts: 39
Joined: Thu Jul 21, 2016 8:04 pm

Re: Help with Amending Taxes for Deceased Relative - Possible to appeal penalties ??

Post by Sandwich » Sat Nov 16, 2019 8:08 pm

Hi Bogleheads,

Thanks for weighing in and providing perspectives :idea: I was not aware of such as the First Time Abatement and calling the IRS Hotline to explain the situation and hoping for a good outcome.

Thus far, I have used a software program to basically backout the Schedule E to clear out the rental loss to come up with the tax shortfall. All their other income was fully reportable on 1099-Rs, 1099-Divs, 1099-SSA, and 1099-Int. They took standard deduction for 2017 and 2018 and anticipate the same for 2019. I am under the impression that this would make the amended 1040X fairly simple.

I am under the impression that backing out the Schedule E would also "restore" the depreciation previously taken in 2017 and 2018 so the basis on the real property would not be reduced if / when later sold in the future. Is this correct. :?:

Regards.

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