Step 3: Notify the IRS – Form 56
An executor, trustee, or other fiduciary should formally notify the IRS that they are the entity’s representative. This ensures all notices, bills, and other correspondence are sent to the person in charge. It also allows the IRS to discuss tax matters pertaining to the entity directly with the fiduciary and for the fiduciary to execute a power of attorney with the IRS (Form 2848); thereby allowing other representatives, such as a tax accountant, to be formally involved in the process.
Step 4: Prepare Tax Returns – Form 1041 & CA 541
After the legal documents have been reviewed, an EIN has been obtained, and the IRS is notified about the fiduciary, the process of preparing required federal and state tax returns begins. Generally, all tax statements reporting income, deductions, or credits will need to be collected and provided to the accountant preparing the returns. Providing detailed information and answering tax related questions, as well as signing a service agreement, are all part of the tax preparation process. In many ways, it’s no different than having one’s individual tax return professional professionally each tax season.
After the tax returns have been prepared then reviewed by the fiduciary, they are ready to be submitted electronically (e-file). Once accepted, the fiduciary should pay any federal or state tax due and distribute a K-1 to all income beneficiaries. It’s important that filing deadlines are met and taxes are paid on time. This will avoid any unnecessary penalties and interest imposed by tax authorities.