IRC 2204: Fiduciary Discharge from Personal Liability

When a person passes away, a fiduciary is appointed to manage their final affairs, including paying any taxes owed. This individual, known as a fiduciary or executor, takes on responsibilities for the decedent’s estate. A primary concern for any fiduciary is the potential for being held personally responsible for the decedent’s unpaid federal taxes. Internal Revenue Code (IRC) Section 2204 provides a formal process to request a discharge from this personal liability. This provision allows the person managing the estate to gain certainty and close the estate without the lingering risk of the IRS seeking payment from their own assets.

Understanding Fiduciary Personal Liability

A fiduciary’s role involves gathering the decedent’s assets, paying debts, and distributing property to beneficiaries. Federal law grants the U.S. government’s claim for unpaid taxes priority over most other claims against an estate. This means before any assets are distributed, the fiduciary must ensure all federal tax obligations are satisfied. If a fiduciary distributes estate assets and the IRS later determines that taxes are still due, the fiduciary can be held personally liable for the shortfall, up to the value of the assets they distributed.

This personal liability is a concern for federal taxes such as estate tax, gift tax, and generation-skipping transfer (GST) tax. For example, an executor files an estate tax return, Form 706, and distributes the estate. If the IRS later audits the return and finds additional tax is due because an asset was undervalued, the executor could be required to pay that tax from their own funds.

The risk of personal liability arises when a fiduciary has knowledge of the tax debt or has notice of facts that would lead a prudent person to inquire about a potential tax claim. This standard makes it difficult for a fiduciary to claim ignorance.

Information Required for the Discharge Application

To request a discharge from personal liability, the fiduciary must submit a written application to the IRS. This application must be filed after the relevant tax returns have been submitted. While the IRS provides Form 5495, its use is not mandatory; a letter containing the required information is also acceptable.

The written request must clearly state that it is an application for discharge from personal liability. It needs to include the decedent’s full name, Social Security number, and date of death, as well as the fiduciary’s name, address, and taxpayer identification number. A copy of the legal document that appoints the fiduciary is also required. This is typically the letters testamentary or letters of administration issued by a probate court, which serve as proof of the fiduciary’s authority. If the application is filed separately from the estate tax return, the fiduciary may also need to attach copies of the filed Form 706.

The Application and Discharge Process

The application must be submitted to the same IRS service center where the decedent’s estate tax return (Form 706) was filed. After the application is submitted, the IRS has a specific timeframe to act. The agency has nine months from the date the application is received, or nine months from when the estate tax return was filed if the application was submitted early, to notify the executor of the amount of tax due. This nine-month window provides a clear timeline for the fiduciary.

Two primary outcomes can occur. The IRS may issue a notice within the nine-month period detailing the final amount of estate tax liability, and the fiduciary must pay this amount to complete the discharge. Alternatively, the nine-month period may expire without the IRS providing any notification of tax due, in which case the fiduciary is automatically discharged from personal liability.

Upon payment of the notified tax or the expiration of the period, the fiduciary is entitled to receive a written document from the IRS confirming the discharge. In situations where the estate has been granted an extension to pay the tax, such as an installment plan, the discharge is not complete until the fiduciary furnishes a bond if required by the IRS. This bond secures the future tax payments and allows the fiduciary to be released from personal liability even while the estate’s tax obligation continues.

Scope and Limitations of the Discharge

Receiving a discharge provides protection, but it is important to understand its boundaries. The discharge releases the fiduciary from personal liability for any deficiency in federal estate and GST taxes found after the fact. This means the IRS cannot pursue the fiduciary’s personal assets to satisfy these specific tax debts. The protection is limited to the individual in their capacity as a fiduciary.

The discharge does not, however, absolve the estate itself of its tax liability. The IRS retains the right to collect any unpaid taxes from the assets still held by the estate or from the beneficiaries who received distributions. The federal tax lien on the estate’s property remains in effect until the tax is fully paid.

Furthermore, the discharge does not release the individual from any liability they may have in another capacity, such as a trustee or a beneficiary. This discharge also does not cover other types of federal taxes, and a fiduciary must use separate procedures under IRC Section 6905 to request discharge from personal liability for a decedent’s income and gift taxes.