Executor Personal Liability Under the Federal Priority Statute

Here is the sentence every executor should read before writing a single check from the estate account:

"A representative of a person or an estate (except a trustee under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government."

That is 31 U.S.C. 3713(b). It is short, it is old, and it is the reason a perfectly honest personal representative in Sarasota can end up owing the IRS out of their own pocket for a debt that was never theirs.

Two halves of one statute

The federal priority statute has two parts that work together.

The first half, 31 U.S.C. 3713(a)(1)(B), says that when a deceased debtor's estate in the hands of the executor is not enough to pay all of the decedent's debts, claims of the United States must be paid first. IRM 5.17.13.2 puts it plainly: the government is entitled to be paid before the heirs receive an inheritance.

The second half, 3713(b), is the enforcement mechanism. If the executor pays someone else ahead of the government, the executor is personally liable up to the amount paid. Pay a $40,000 credit card balance while a $60,000 income tax debt goes unpaid in an insolvent estate, and you now owe the IRS $40,000.

IRC 6901(a)(1)(B) gives the IRS a streamlined way to collect that liability. The IRS can assess fiduciary liability under 3713(b) using the same procedures it uses for the underlying tax, rather than filing a lawsuit first. The guide to transferee liability covers how that assessment works.

The elements the IRS has to show

IRM 5.17.13.7 describes what triggers personal liability. In plain terms:

1. The estate was insolvent, or became insolvent because of the payments. This is balance sheet insolvency: debts exceed assets. A solvent estate that can pay everyone does not trigger priority.
2. The executor paid other debts or made distributions first. Distributions to heirs count. So do payments to ordinary creditors.
3. The executor knew, or should have known, about the federal claim. Notices in the mail, a recorded federal tax lien, an unfiled return the executor was aware of, or an assessment on the transcript can all establish knowledge.

Liability is limited to the value of what was paid out in violation of priority. It is not unlimited. But it is personal, and it follows you after the estate closes.

What the knowledge element really means

Executors often tell me they had no idea the decedent owed anything. Sometimes that is a complete defense. Often it is not, because knowledge includes facts that would put a reasonable person on inquiry.

If the decedent's mail included letters from the IRS, if the decedent obviously stopped filing returns years ago, or if a title search on the house turned up a federal tax lien, the executor is on notice. Choosing not to open the envelopes does not help. The better practice is to go find out. The guide to getting IRS transcripts for a deceased taxpayer walks through it.

How long the IRS has to come after the executor

Fiduciary liability has its own limitations period. Under IRC 6901(c)(3), the IRS must assess the liability of a fiduciary not later than one year after the liability arises, or by the end of the period for collection of the underlying tax, whichever is later. Because the collection period under IRC 6502 is generally ten years from assessment, an executor's exposure for an improper distribution can last a long time after the estate closes.

What can be paid ahead of the IRS

The statute has no written exceptions, but the IRS recognizes several. IRM 5.17.13.5 explains that courts have allowed certain classes of claims ahead of the tax debt:

• Administrative expenses, such as court costs, reasonable compensation for the personal representative and the estate's attorney, and costs of collecting and preserving assets.
• Funeral expenses.
• Homestead or family allowances.

The key word is reasonable. The same IRM section says the expenses must be reasonable and necessary to the administration of the estate, and that state law guidelines are considered but are not controlling. A modest funeral and a fair attorney fee are safe. A lavish memorial and a fee that tracks nothing in particular will draw scrutiny.

Secured creditors are a separate analysis. A mortgage that was recorded before a federal tax lien arose generally keeps its place. That is lien priority, not the priority statute, and it is one reason the order of operations in an insolvent estate deserves a careful look before anything is paid.

Florida probate and the federal claim

Florida has its own order of payment for estate obligations in Florida Statutes 733.707. Administration expenses and funeral expenses come first, and debts and taxes with preference under federal law follow. Florida law and federal law line up fairly well on the order. Where they do not, federal law wins.

Here is where Florida executors get hurt. Florida's creditor process is fast. After the notice to creditors is published, most claims must be filed within three months under Florida Statutes 733.702, and Florida Statutes 733.710 bars most claims two years after death. Executors reasonably conclude that once those deadlines pass, they are free to distribute.

Not against the IRS. State nonclaim statutes generally do not bind the United States. The IRS has its own assessment period under IRC 6501 and its own collection period under IRC 6502. A Sarasota County probate judge closing the estate does not close the IRS's file. If the IRS files a proof of claim in probate, good. If it does not, the debt is still there.

Non-probate assets

IRM 5.17.13.9.3 points out that jointly held property and other assets passing outside probate are generally not part of the estate in the executor's custody. That matters for 3713(b), because the executor cannot be liable for distributing property they never controlled.

It does not mean those assets are safe from the IRS. Recipients of non-probate property can face their own exposure as transferees, and for estate tax, the special estate tax lien under IRC 6324 follows the gross estate regardless of how it passes. Executors are also given rights under IRC 2206 and 2207 to recover estate tax from life insurance beneficiaries and certain other recipients.

A practical sequence for staying safe

1. Tell the IRS who you are. File Form 56.
2. Find out what is owed. Pull account transcripts for the last several years and check for liens.
3. File what is missing. The final Form 1040, any delinquent years, and the estate's own Form 1041 if required.
4. Shorten the assessment window. For income tax returns, request prompt assessment on Form 4810, which limits the IRS to 18 months.
5. Ask for discharge. Request discharge from personal liability on Form 5495.
6. Hold a reserve. Do not distribute everything until the IRS responds or the periods run.

If the estate is insolvent and the IRS is one of several creditors, the analysis gets more involved. In some cases an offer in compromise for the estate is worth exploring, though the IRS will not accept less than it would get through probate.

The bottom line

Most executors are family members doing a hard job during a hard time. They want to pay the bills, honor the will, and get the estate closed. That instinct is exactly what the priority statute punishes when there is a federal claim in the background.

Slow down, find out what is owed, and pay in the right order. The heirs will wait. The IRS will not.

If you are serving as personal representative and the decedent owed the IRS, call (813) 229-7100 before you distribute. Let's talk.