E311 The Latest Probate Tax Delay is 1040 Verification

Tax clearance is taking even longer lately because of a new twist: 1040 verification. Everyone agrees it’s important to keep the tax bogeyman satisfied, but all these layers of delays are frustrating our clients and us. Below we’ll explain what’s happening here.

What is tax clearance and why does it take so long?

The executor needs to make sure that the IRS agrees no more taxes are due. This is important because the executor is personally liable for unpaid taxes. If the executor makes distributions to the heirs and the heirs sign indemnity agreements, then the heirs will be liable for taxes.

Maybe you’re thinking that your loved one’s estate was so small that there’s no estate tax. We’re not just talking about estate tax, but final 1040s, payroll, small business, retirement payouts, and just about everything else. Still don’t think it applies? You’d be surprised how complex someone’s tax situation can be. The IRS is pretty good at combing through the past six years to make sure they get everything owed to them (it’s the IRS’s last chance to be paid).

Why does it take so long, generally? As with any bureaucracy, it takes the executor a while to gather all information and past returns. (Try getting a tax transcript quickly from the IRS!). The IRS will also take their time since this is their last bite at the apple. And lately, everything related to the IRS takes way longer due to unprecedented delays and backlog. As you recall, the lock-downs were in 2020. It’s mind boggling how the IRS is so backed up three years later.

Now the IRS wants verification

If the estate is owed a refund on any of its final returns, the IRS now requires identify verification of the decedent. It’s understandable that the IRS is taking these measures, since scammers posing as IRS agents have become ubiquitous. But the result is that estates are getting stuck for more weeks or months because of $10 refund.

Why does IRS verification cause longer delays?

It’s because all bureaucracies are slow, and are even slower if your situation is not on their main “script.” For example, if you go to the bank to open a personal checking account, it’s easy for the tellers who open checking accounts several times a day. But if you have a non-traditional request, such as closing a decedent’s account, the teller probably has to go ask a manager for help. When you go off-script from procedures that an employee is used to, then things can go haywire.

Whether it’s multinational banks or the largest government in the world (US), these bureaucracies struggle with edge case situations. It’s very hard to find a competent banker, branch manager, or IRS agent who understands what an executor is, let alone the correct procedure for dealing with a deceased customer or taxpayer. You’re pretty lucky if you speak to a knowledgeable agent on your first call, if you get to speak to anyone at all.

Can’t we just forego the $10 refund? Ah, nice try. The IRS will not process the return (not just the refund check) until they verify the decedent’s identity. When a return is not processed, you can’t get confirmation of the final balance and therefore the final release from liability.

For example, when you call the IRS to verify, they ask if you are the decedent. Once you tell them you are the executor, it heads downhill from there. It sounds absurd, but it happens.

The 1040 verification is a new procedure, so this is a heads up for those facing a new estate. For those who have been working on an estate for a while, this could be a reason why the estate is now dragging on. When we say that we’re waiting along with you, we mean it. It’s an uphill backwards in the snow with no shoes kind of battle.

Probate

Check out my book, “How Probate Works,” and when you get to the chapter on delays, just add on more time. Unfortunately, that’s the way things are right now.

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