[janka]

Hello…I received a notice from IRS saying that I owed $21,000 taxes and penalties for securities that I did not report on my 2005 tax return. The securities belonged to my mother who died on 12/30/2004. After the holiday, I notified [Prudential] that my mother had died.

You should know this: When my mother moved into an assisted living complex she was 90 years old, she added my name to her investment account in order to help her withdraw money as she needed it to pay her rent and living expenses.

When I notified Prudential, the joint account was closed and the money was moved into a new account with my name on it. I presumed they did this so that I could easily withdraw the money and distribute it (equally) to the four heirs named in mother’s will. The amount in the account was about $62,000. The investment account, a small checking account, and personal belongings in her apartment were her only holdings when she died. (She did not own a home or real estate.)

No, I did not report any of the securities on the ’05 tax return because I thought the securities belonged to my mother. I withdrew the money in April (from the new account with my name on it) and distributed the money equally to the 4 heirs (my brother, 2 sisters, and me). I did not claim the $15,673 that was my share because I thought amounts less than $100,000 were not taxable.

I responded to the IRS notice with all the information and explanations to help solve the problem. I did not believe I owed the IRS anything. Now I have received a reply from the IRS in the form of another IRS notice. Now they say that I owe about $5,000 for taxes and penalties on about $15,600 (which is approx. one-fourth of the original $62,000. I still don’t believe I owe the IRS anything for investments that belonged to my deceased mother and that have been distributed according to her will.

My question is: Am I wrong; do I owe money to the IRS and what should I do now?

Thanks to all who answer my question,
janka

[ebaines]

Please clarify something - you said you "withdrew the money in April" - does that mean you distributed the securities in April, or does it mean that you sold the securities and distributed the cash in April? If you distributed the securities, did you subsequently sell your share?

Seems to me that if you sold the shares prior to the distribution, this was while the securities were still part of your mother's estate, and you should have reported the sale on a 2005 income tax form that you should have filed on behalf of your mother's estate. Did you file such a return?

If you distributed the securities from the estate directly to the heirs, and then subsequently you sold your shares, you should have reported the sale of your securities on your personal income tax, using a tax basis of the market value the securities had on the date of your mother's death. If you failed to report this sale, then the IRS will assume that the basis is $0, and try and tax you accordingly (plus penalties and interest). If this is what happened suggest you write another letter explaining what the tax basis is, and if in fact you made no gain onteh sale be sure to state that.

[ScottGem]

Just to clarify, is the problem your 2005 tax year return (filed in 2006) or your 2005 return for tax year 2004?

If the tax year is 2004, it may be that putting you as joint owner of the account was considered a gift. If you were (as it appears) added as joint tenant with right of survivorship, then the securities passed to you outside the estate. That you followed your mom's wishes in distributing it may be immaterial, because you actually owned the whole thing.

I suggest you make an appt to meet with an IRS rep, it might help if you had your own rep with you, and discuss the situation. It's a bit muddled by what your mom did. It sounds like it was not done the way it should have been.

[AtlantaTaxExpert]

Janka:

There are TOO MANY variables to properly comment on this matter on this forum.

There may be GIFT tax considerations, which would require the late filing of a gift tax return.

I agree that the money was NOT yours, but was the estate's, but you mishandled it when you put exclusively in your name. Prudential (who SHOULD know better) also screwed up by transferring he money into your account instead of a fiduciary account under the control of the estate's executor.

Ebaines' point about the requirement for a 2004 tax return in your mother's name is valid. Further, a fiduciary return (Form 1041) for 2005 is probably also needed.

The IRS will take the position that nets them the greatest amount of tax. Given the amount of tax being owed, you need to get a tax professional on your team IMMEDIATELY!

I recommend you contact an enrolled agent. When you interview him/her, make sure they have some experience on the estate tax issues (though I agree with your position that NO estate taxes are due).