Dad filed his taxes but didn’t pay. Several years pass by, say five years. Dad dies. The family eventually files for probate several years later. Say 10 years has passed since the taxes were first due? Has the time limit for the IRS to collect the unpaid taxes lapsed?
How does the filing of the probate case impact the IRS’s collection time limit?
The IRS recently asked its tax attorneys this question in CCA 202044008. What did the IRS attorneys conclude? They concluded that they did not know.
Texas law provides for several out-of-court alternatives to probate. Texas law also provides an informal probate process. So this question is particularly relevant to probate cases in Texas.
Time Limit for the IRS to Collect
The IRS generally has ten years from the date the tax is assessed to collect unpaid tax debts.
Tax is assessed when a taxpayer voluntarily files a tax return to assess the tax or the IRS records the liability on its books.
The IRS has to use its levy powers or bring suit in district court to collect the taxes before this ten year period ends. The IRS is barred from doing so after the ten year period lapses.
Understandably, the IRS tracks this collection date. The IRS refers to this date as the Collection Statute Expiration Date or CSED.
There are several circumstances that toll or extend the IRS’s ten year CSED.
The CSED May be Suspended for Some Probates
The exception found in Sec. 6503(b) is one of the rules that suspends the CSED in some cases. Section 6503(b) provides as follows:
The period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period the assets of the taxpayer are in the control or custody of the court in any proceeding before any court of the United States or of any State or of the District of Columbia, and for 6 months thereafter.
The IRS memo addresses whether assets are in the custody or control of the court:
IRM 18.104.22.168(7) provides as follows: “If the proceeding is independent, unsupervised or informal, then assets of the deceased are not under control of the probate court. Collection action may be pursued.” There appear to be several other IRM provisions with similar language including: IRM 22.214.171.124, IRM 126.96.36.199, and IRM 188.8.131.52. In addition, Legal Reference Guide/IRM 184.108.40.206.1(3) explains that “Property will not be in the custody of the court if: (a) There is no judicial probate proceeding (e.g., there is an informal non-judicial proceeding, or no proceeding at all).”
These rules seem suggest that the CSED is not suspended during a time when the IRS is able to collecting the unpaid taxes. This makes sense. If the IRS can collect and if it chooses not to do so, the CSED should not be suspended.
When the IRS Files a Claim in the Probate Case
But what if the family files for probate and the IRS files a claim in the probate case?
The IRS memo goes on to cite the United States v. Estate of Chicorel, 907 F.3d 896 (6th Cir. 2018) case that addresses this situation.
In Chicorel, the probate was not supervised by the court. The IRS filed a claim in the probate proceeding. The personal representative did not act on the claim. Seven years later, after the CSED would have expired, the IRS filed suit to collect the unpaid taxes.
The court concluded that the filing of the claim in the probate proceeding was filed timely and held open the CSED for the IRS. The act of filing the claim was sufficient for the assets to be before the court.
But the IRS rarely files a claim in probate estates. The court did not address whether the probate itself, absent the filing of a claim, would be sufficient. While a court might find that a formal supervised probate means that assets are before the court, what about an informal probate like the one cited in the IRS memo?
This is an important question. It is particularly important in states, like Texas, that have several alternatives that can be used in lieu of formal probates.
Informal Probate in Texas
Texas law allows for various alternatives to probate. Those who are administering probate cases in Texas for decedents who had unpaid tax balances should carefully consider these options.
These options include filing an affidavit of heirship to transfer title to real estate, transfer on death deeds, etc. These methods of transferring property are clearly out-of-court, so they would not trigger the Sec. 6503(b) limitation.
Texas law also allows for small estate affidavits (when there is no will) and muniments of title (when there is a will). These methods of transferring property are filed with the court, but they stop short of being a formal probate. It would appear that these options do not trigger the Sec. 6503(b) limitation.
It should also be noted that there is no mechanism for the IRS to file a claim with a small estate affidavit. With the muniment of title, a claim can be filed but there is no ability to force the applicant to respond to it. It is not really a claim per se. It is not clear whether the IRS could file a claim in these cases to suspend the CSED under Sec. 6503(b).
Texas law also allows for independent administration. This type of probate involves the court appointing the personal representative, but allowing the probate to be administered outside of court. This type of probate is similar to that described in the IRS memo. It is not clear whether this type of probate triggers the Sec. 6503(b) limitation.
The IRS is able to file a claim in in independent administration cases in Texas. However, what counts as a claim in an independent administration is not all that clear. It may be that even a simple IRS notice listing a balance is a claim in an independent administration.
If the IRS did try to collect after the CSED expired based on the Sec. 6503(b) limitation, naturally, the estate could argue that the assets were not before the court. Absent a claim being filed by the IRS in the probate proceeding, it would seem that the Sec. 6503(b) limitation would apply.
Those administering estates for decedents who had unpaid taxes may need to consider what type of probate proceeding to pursue.
For those who can exercise patience, this could be an instance where a wait-and-see strategy could result in the IRS’s CSED expiring. This could save the estate beneficiaries significant sums of money in some cases.
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