How to Pay the Tax for Estate Form 706
5 of 8 in Series: The Essentials of Filing the Estate Tax Return (Form 706)
The guidelines for paying the federal estate tax are simple. Make sure payments made to the IRS include the decedent’s name and Social Security Number. You can pay with a credit or debit card but may incur substantial convenience fees. Prepare Form 706 accurately and file and make payments on time to avoid penalties. Any and all co-executors of an estate are liable for the return as it is filed.
How to pay the estate tax
There are two options for paying the estate tax:
By check, bank draft, or money order: Make it payable to United States Treasury. Be sure to include on the check the decedent’s name, Social Security Number, and the words Form 706 which indicates to the IRS what tax you are paying and for whom.
By credit card or debit card: Go to the IRS website and enter pay taxes by credit card in the search box. Clicking on the first search result gives you a list of all the service providers you may use, their fees, and their Web sites and telephone numbers.
Be aware that the IRS convenience fees can be substantial for credit cards and you may have to explain to the heirs or a judge reviewing your estate accounting why you incurred the convenience fee.
Penalties: Late filing or payment, and valuation understatements
File your Form 706 and pay the tax on time, because you incur penalties for late filing and late payment unless you can show reasonable cause for the delay. If you’re filing the 706 after the due date (or extension), be sure to attach an explanation to the return to try to show reasonable cause.
In addition, you pay interest on the amount of tax due from the due date for filing until the tax is paid, unless you’ve applied for and received an extension of time to pay the tax.
If the IRS catches you undervaluing assets not only do you have to pay the additional tax, but valuation understatements that result in tax increases of more than $5,000 also cost you a 20 percent penalty. The IRS defines a valuation understatement as reporting the property’s value as 65 percent or less of its actual value on Form 706.
The penalty jumps to 40 percent for property valued at 40 percent or less of actual market value. Although, in most cases, you certainly want to use the lowest valuation supportable, never undervalue assets.
Signatures and liability: Dealing with co-executors
List all executors or administrators, if more than one exists, on the return. All co-executors are responsible for the return’s contents and all are liable for any penalties for erroneous or false returns.
Only one co-executor is required to sign the return regardless of how many there are. Having all co-executors sign the return is preferable, if at all possible, so that it’s clear to everyone that you’re all liable for the return as it’s filed. Relying on one co-executor who is knowledgeable in 706 preparation to prepare the return is fine, as long as everyone else thoroughly reviews the return.
The executor who prepares the return must sign the declaration on page 1 under penalty of perjury. If you rely on a paid preparer to prepare the return, they must also sign and complete the preparer info on page 1 of the return.