Suppose an estate has been probated and distributed according to the wishes of the deceased, all taxes - as agreed by the IRS / HMRC - paid, and a modest time thereafter, part of the estate is realised to have significantly more valuable?
Scenario 1. Part of the estate you have inherited is a copy of a painting by Claude Lorraine. The original is in the Louvre and worth millions. There are modest differences between the two. You’re having the painting cleaned professionally, and the professional realises that it is a real Claude Lorraine, just not as good as the one in the Louvre. This is confirmed by an expert.
Scenario 2. You’ve inherited a bust of Great Aunt Mathilda. It’s unsigned. Family history has it that it was done for your Great Great Uncle Albert by a Russian noble around the time of the Revolution when he was in Russia; he died on the voyage home. No real monetary value, but great sentimental value. Except you accidentally drop it and it shatters. Inside is a rather large Faberge egg.
IANAL - I would suggest that if the will an estate were executed honestly and straightforward and with proper care, then nothing happens. If the IRS thinks that the undervaluation was deliberate, or somehow done with “willful blindness” then odds are they would ask for a correction. The question would become “how did the executor miss it?”
As for hidden treasure like a Faberge egg or Maltese Falcon, if there was no hint it was there, the IRS would have trouble showing the evasion was willful.
Not sure if there’s a statute of limitations on this sort of stuff, but I imagine there is - with or without deliberate deceit.
I’d imagine that the IRS would have no problem at all with it. Upon sale, it’d be covered by the capital gains tax. As it had nearly no value upon receipt, the basis value would be low, and the sale price would be high. The tax would be paid on the difference.
The IRS only has 3 years before the statute of limitations on a tax return runs out. Most preparers will make an election to shorten that to 18 months on an estate. After that time, it’s too late to make any assessments arising from non-fraudulent errors. If an adjustment is made by the IRS to a tax return before the statute of limitations, the estate will pay if it’s still open; otherwise, the personal representative might be held liable for the tax. (Hence the reason to elect to shorten the statute of limitations).
It might actually be to the IRS’s benefit for some valuable item to escape the estate, since most people pay no estate tax. On a larger estate, though, the estate tax is a lot higher than the capital gains tax that would be paid by the heir.
When the item is taxed in the estate, then heir gets a “step up in basis” so that the gain is only the difference between sale price and the value at the date of death. So, the failure to assign a proper value within the estate means the heir pays tax on a large capital gain.
I’m not sure about other legal issues, like other heirs claiming they were short-changed.