October 27, 2018

IRS Can Use Probate Process to Extend Collection Period

Tax Relief Articles

Houston Tax Attorney

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When a loved one dies, the person who serves as the personal representative is tasked with wrapping up the decedent’s affairs and paying known creditors.  But what if one of the creditors is the IRS?  Can the probate process extinguish unpaid IRS taxes?  The recent United States v. Chicorel, No. 17-2321 (6th Cir. 2018) provides an opportunity to consider this issue.

Facts & Procedural History

The taxpayer, an individual, failed to pay his taxes for the 2002 tax year.  The taxpayer died in 2006.

The taxpayer’s nephew was appointed as the personal representative for the taxpayer’s estate in 2007.  The nephew published notice to creditors apprising them of the need to submit any claims within four months.  He did not notify the IRS.

In 2009, the IRS filed a claim in the probate proceeding.  The nephew did not pay or deny the IRS’s probate claim.  In 2016, which is more than 10 years after the tax was assessed, the IRS brought suit in district court to reduce the tax liability to judgment.

The question for the court is whether the IRS can bring suit to collect unpaid taxes more than 10 years after the tax is assessed.

The 10 Year Collection Period

The general rule is that the IRS has 10 years from the date a tax is assessed, i.e., the date the IRS records the tax liability as a liability on its books, to collect from a taxpayer.  If the 10 year period lapses, the IRS is forever barred from collecting the unpaid tax debt.  This is found in Section 6502.

Section 6502 includes this language:

If a timely proceeding in court for the collection of a tax is commenced, the period during which such tax may be collected by levy shall be extended and shall not expire until the liability for the tax (or a judgment against the taxpayer arising from such liability) is satisfied or becomes unenforceable.

This exception extends the 10 year rule if there is a timely court proceeding for the collection of tax before the 10 year period has lapsed.

Probate Claim is a Court Proceeding

The IRS filed a claim in the probate proceeding in 2009.  This is less than 10 years after the IRS assessed the tax in 2002.  But is a claim filed in a probate proceeding a “court proceeding for the collection of tax” for purposes of Section 6502?

The U.S. District Court had little difficulty in concluding that the claim submitted in a probate proceeding is a claim for purposes of Section 6502.  It did so by construing Michigan’s probate laws.  Because the personal representative did not give the IRS notice of the claim period, the IRS was able to file a late claim in the probate estate.  As noted by the court, the court did not have to decide whether a late claim filed by the IRS with the probate court would suffice.

It should be noted that some states have laws that say that notice only has to be provided if the personal representative had actual notice of the IRS debt.  According to our Houston probate attorneys, Texas law provides for this, for example.  Perhaps Michigan probate law does not provide for this.  Or perhaps the personal representative actually knew of the IRS debt.

The takeaway from this case is that probate estates for decedent’s who owe taxes is that they may not be able to wait out the 10 year collection period.  They should consider whether it is necessary to notify the IRS of the claim period given the applicable state probate laws.  The court case also provides instruction as to how to evaluate IRS claims submitted in the probate process.

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