Academic journal article Journal of Accountancy

Liability for Unpaid Taxes When Wrong Advice Is Given

Academic journal article Journal of Accountancy

Liability for Unpaid Taxes When Wrong Advice Is Given

Article excerpt

Taxpayers must often rely on professionals to advise them on tax matters. Estate taxation can be particularly complicated for a layman. The personal representative of an estate, responsible for administering a decedent's financial affairs, often has no knowledge of tax issues. Fiduciaries who disregard claims of the United States (including income tax liabilities) are held personally responsible for any unpaid amounts. Frequently, these individuals need professional advice about disbursements of funds to creditors, beneficiaries and the taxing authorities.

Jerry J. Calton died intestate in 1989. His friend, William D. Little, was asked to act as personal representative. Little had no experience as a fiduciary and sought guidance about the estate's administration. Soon after Little was appointed personal representative, the estate hired an attorney. Little promptly forwarded tax forms and tax notices he received regarding the decedent to the attorney. Notwithstanding several W-2s and 1099s the estate received on the decedent's behalf, the attorney advised Little the estate owed no taxes due to its small size.

Based on advice from the attorney that there was no tax liability, Little disbursed most of the estate's assets to creditors and beneficiaries. Soon after, the estate received a notice of deficiency from the IRS proposing a tax liability based on the decedent's earnings before his death and on the estate's income. Little forwarded the notice to the attorney, who again told him no federal taxes were due.

The attorney hired a CPA to review the administration of the estate prior to its closing. The CPA discovered the tax documents and assessments and filed the required returns. Although there was a balance due, the estate sent no money with the returns. (The estate, however, stopped disbursing funds once it became aware of a potential tax liability.) Little subsequently sent an offer in compromise to the IRS, submitting the estate's remaining funds ($17,586.07) as full payment of the tax liability. The IRS did hot accept the offer and returned the check without explanation. The attorney and the CPA met with the IRS and came away with the erroneous belief that the IRS was canceling the tax liability as a result of the meeting. …

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