If an estate or gift tax return is ever subject to a lien and you are the third party to that return, you may be responsible for an outstanding tax liability. An example of a third party to an estate and gift tax return would be a beneficiary or a donee. This type of collection procedure is relatively new and becoming more common throughout the country.
Estate Tax Lien
In most instances, the IRS will first attempt to collect a tax liability from the actually estate. If this liability is not paid in full, the IRS will then assess the remaining tax to the person who received property from the estate.
It is important to remember that you can have both an outstanding federal tax lien and a special estate tax lien. An estate tax lien does not attempt to collect income tax resulting from the estate.
At the time of death, an estate tax lien is automatically applied to the estate. This is not the same estate tax lien that will subject third parties to collection for taxes owed by the estate. Once it is determined that the estate has not paid its tax liability it will extend the tax lien to collecting from third parties associated with the estate.
The liability that a third party would be responsible for is the value of the property received at the time of death from the estate.
Who Can Be Held Liable As A Third Party?
There are many individuals that the IRS considers to be third parties of an estate. These individuals include:
1. The spouse of the decedent
2. Individuals that are transferees of the estate
3. Beneficiaries of the estate
4. Individuals that are in possession of property which was issued to them by the estate
6. Individuals that receive property as a surviving tenant
If you are one of the individuals listed above, you are personally liable for the estate tax liability as a third party. This grants the IRS the ability to collect this outstanding tax through administrative and judicial means. It is as if the IRS views you as not receiving the property from an estate but being in possession of the property all along.
What If I transfer Or Sell the Property I Received?
If you sell or transfer property that you have received from an estate, you will still be subject to a special estate tax lien. The lien will actually transfer from the property sold to the proceeds received from selling the property. This means that you cannot simply transfer your liability as a third party to an estate by transferring the property received.
Gift Tax Lien
In regard to gift tax, if the donor does not pay the required tax on the gift, the donee will be held personally liable for the tax for up to 10 years.
If you receive a gift from someone and they decide that they don’t want to pay the tax on giving a gift, the IRS will hold you personally responsible and require you to the pay the outstanding tax liability.
Similar to an estate tax lien sale or transfer, you cannot simply sell your gift and eliminate the gift tax lien associated with the property. If the IRS has determined that you as the donee are responsible for the outstanding tax liability, they will not pursue a purchaser of said property.