Elderly parents and tax issues - Tax Tip of the Week
Last month, two clients came to us with the same problem.
One client had just admitted their remaining parent to a nursing home. The other client’s last parent had just passed away. In both cases, these adult children realized their parents had not been filing tax returns for the last several years—in one case, it had been 10 years since a return had been filed!When a tax return is not filed, the IRS assesses a tax liability based upon a Substitute For Return (SFR). These SFRs are based simply on the reported income on W-2s, 1009s, etc. without any regard to possible deductions or cost basis issues. In one of these cases, the IRS was assessing a tax liability on the estate of over $100,000—when the actual liability should have only been about $2,000.If you suspect your elderly parents might no longer be able to handle their financial affairs properly, you should have an attorney execute a Power of Attorney (POA) naming you or another trusted individual Attorney-in-Fact (“Agent”). The powers granted by the POA discontinue at the time of death. After death, an Executor must be appointed.Once you have the attorney prepared POA, you can then file for a special POA with the IRS on Form 2848. After death, a Form 56 will need to be filed with the IRS to be recognized as the Executor. After filing Form 2848, you can then request transcripts from the IRS to ensure tax returns have been filed correctly, if at all. Transcripts can be ordered by filing Form 4506-T; it will take about two to three weeks for delivery. If you go to a tax practitioner who is a certified IRS e-services provider, you can get these transcripts in a manner of minutes.No one likes to watch their parents lose their independence, but monitoring their tax returns is one way to prevent surprises and costly mistakes.As always, give us a call if you have any questions. In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit http://www.bradstreetcpas.com.Rick Prewitt - the guy behind TTW...until next week.