Pay the Heirs Before the IRS and the Executor Owes the Tax Out of Pocket. A 1797 Law Puts Uncle Sam First in Line, and Form 5495 Is the Only Way Off the Hook

A 58-year-old daughter was named executor of her mother’s estate: a paid-off house and a brokerage account worth $900,000 combined. While sorting the mail after the funeral, she found an IRS letter questioning her mother’s income for the year before she died. She put it in a folder and kept going.

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

Fourteen months later the IRS finished its review. Her mother owed $74,000 in tax, penalties and interest. The estate had nothing left to pay it with, so the bill went to the daughter personally.

A Federal Law Gives the IRS Priority Over Heirs

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

The statute traces mainly to the Act of March 3, 1797, and has been described as “almost as old as the Constitution.” Courts treat checks to heirs as payments. They also add two conditions: the estate was insolvent when the money went out, and the executor knew about the federal debt or had notice of facts that would have led a reasonably prudent person to inquire. The IRS letter in the folder counts as that notice.

That chapter covers the same ground in its own words. Section 2205 states that the tax is to be “paid out of the estate before its distribution.”

How the Daughter Ends Up Owing $74,000

• The $900,000 estate, split three ways, came to $300,000 per child.
• Once the checks cleared, the estate held $0 against a $74,000 federal claim. That made it insolvent.
• Her personal exposure is capped at what she paid out, all $900,000. That is far more than the bill, so she owes all of it.
• After paying, she keeps $226,000. Each brother still has $300,000.

To get any of it back, she has to ask each brother to return about $24,667 or take him to court under state law.

Form 5495 Starts a Nine-Month Clock

The way out 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) lets the executor file a written application after the return is filed. Once the executor pays whatever amount the IRS names, or once 9 months after receipt of the application pass with no notice, the executor is “discharged from personal liability for any deficiency in such tax thereafter found to be due.” Form 5495 is a request for discharge from certain personal liability as a fiduciary, and acting within the United States qualifies.

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

The release has limits. Treasury regulations say it covers the executor “in his personal capacity and to his personal assets”. It does not release estate assets still under the executor’s control, and it does not lift that lien.

IRC section 6905 covers a decedent’s income and gift taxes; IRC section 2204 covers estate tax. The rules differ, including how the IRS’s response period and payment of the amount determined apply.

Waiting Nine Months Is Worth $49,333 to Her

In the other version, she files her mother’s final return, files Form 5495 and keeps the estate open with the cash in hand. The IRS claims the $74,000 inside the nine-month window, and she pays it from the estate. Each child then gets $275,333.33.

That is $49,333.33 more than the $226,000 she ends up with in the first version, and nobody has to sue a brother. If the IRS says nothing for nine months, she is released and can send out every dollar.

Four Steps Before Any Inheritance Check Clears

1. Open every IRS envelope addressed to the deceased person. File Form 56 to tell the IRS 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 accepts an application filed after the return.
3. Send Form 5495 and put the nine-month deadline on the calendar. If the estate is above $15,000,000, include the Form 706 estate tax under Section 2204.
4. Keep a cash reserve until the release comes. If the 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 tell you how refunding agreements and claims against heirs work there.

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

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

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