Distribute the Inheritance Too Soon, and the Executor May Have to Cover the IRS Bill Personally. A 1797 Federal Rule Puts the Government First, and Form 5495 Is the Main Escape Hatch

A daughter handed out her late mother’s entire estate to the heirs, and then the IRS finished its audit and sent the tax bill to her. An old federal law made her personally responsible, and there was a…

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A 58-year-old daughter served as executor of her mother’s estate, which consisted of a paid-off home and a brokerage account worth $900,000 together. While going through the mail after the funeral, she found an IRS letter raising questions about her mother’s income for the year before her death. She set it aside and continued with the estate.

The house was sold. She wrote three checks for $300,000 apiece, one to herself and one to each of her two brothers, and then closed the estate account.

Fourteen months later, the IRS completed its review. Her mother owed $74,000 in tax, penalties and interest. Because the estate had no money left, the government turned to the daughter personally.

Federal Law Gives the Government First Claim

The governing rule is the federal priority statute, 31 U.S.C. § 3713. It provides that a claim of the United States “shall be paid first” when an executor is handling a deceased debtor’s estate that is “not enough to pay all debts of the debtor.” Subsection (b) sets out the penalty: an estate representative who pays other debts before the government’s claim is “liable to the extent of the payment for unpaid claims of the Government.”

The law traces mainly to the Act of March 3, 1797, and has been described as “almost as old as the Constitution.” Courts treat distributions to heirs as payments. They also require two things: the estate was insolvent when the money went out, and the executor knew about the federal debt or had enough information that a reasonably prudent person would have investigated further. The IRS letter in the folder counts as notice.

Section 2205 says the same thing in different words: the tax must be “paid out of the estate before its distribution.”

Why the Daughter Ends Up on the Hook for $74,000

• The $900,000 estate was divided evenly, leaving $300,000 for each child.
• After the checks cleared, the estate had $0 available against a $74,000 federal claim, so it was insolvent.
• Her personal exposure is limited to what she distributed, the full $900,000. That is more than enough to cover the bill, so she owes the entire amount.
• After paying the tax, penalties and interest, she keeps $226,000. Each brother still has $300,000.

To recover anything, she would have to ask each brother to return about $24,667 or sue under state law.

Form 5495 Triggers a Nine-Month Deadline

The exit route is Form 5495, Request for Discharge from Personal Liability Under IRC Sec. 2204 or 6905. For a decedent’s income and gift taxes, Section 6905(a) allows an executor to file a written application after the return is filed. Once the executor pays whatever amount the IRS specifies, or once 9 months pass after the IRS receives the application with no notice, the executor is “discharged from personal liability for any deficiency in such tax thereafter found to be due.” Form 5495 requests discharge from certain personal liability as a fiduciary, and filing from within the United States qualifies.

Section 2204(a) offers the same protection for estate tax, and the IRS also has 9 months to respond. That matters to fewer families. The filing threshold for deaths in 2026 is $15,000,000, and only 2,663 of the 7,195 returns filed in 2024 owed net estate tax.

The discharge is limited. Treasury regulations say it protects the executor “in his personal capacity and to his personal assets.” It does not free estate assets still under the executor’s control, and it does not remove the lien.

IRC section 6905 applies to a decedent’s income and gift taxes, while IRC section 2204 applies to estate tax. The rules are not identical, including how the IRS response period works and how payment of the determined amount is handled.

Waiting Nine Months Would Have Saved Her $49,333

In the better version, she files her mother’s final return, submits Form 5495 and keeps the estate open with the cash available. The IRS asserts the $74,000 claim within the nine-month window, and she pays it from the estate. Each child then receives $275,333.33.

That is $49,333.33 more than the $226,000 she ends up with in the first version, and no one has to sue a brother. If the IRS says nothing for nine months, she is released and can distribute every dollar.

Four Steps to Take Before Cutting Any Inheritance Checks

1. Open every IRS envelope addressed to the deceased person. File Form 56 to notify the IRS that you are the fiduciary, then request transcripts with Form 4506-T so you can see what the IRS already knows.
2. File the final Form 1040 and any missing returns first. Section 6905 only allows an application filed after the return.
3. Submit Form 5495 and calendar the nine-month deadline. If the estate exceeds $15,000,000, include the Form 706 estate tax under Section 2204.
4. Hold back cash until the discharge arrives. If heirs need money sooner, make a partial distribution and have each heir sign a refunding agreement.

An estate tax attorney in the decedent’s state can explain how refunding agreements and claims against heirs work there.

Section 3713 is one of several IRS rules that can quietly erase six figures from a family inheritance before anyone realizes what happened. We listed it with eight others, which you can read here: The Retiree’s Tax Trap Map.

For this daughter, waiting nine months would have kept $74,000 of her own money out of the IRS’s hands.