Understanding What Happens to IRS Debt When You Die: A Comprehensive GuidePersonal Taxes
It’s hard to overstate the importance of strategic estate planning because making mistakes when planning an estate can significantly reduce the value of the assets your family inherits.
Understanding what happens to the IRS debt when you die is an essential part of the estate planning process. The IRS won’t forgive your debts after your death, and in most cases, the funds to settle the liability will come from your estate.
You should be aware of several exceptions to this rule when planning your estate, as the heirs may be responsible for the IRS debts in specific contexts.
In this comprehensive guide to understanding what happens to IRS debt when you die, we’ll cover all implications of leaving federal tax liabilities behind.
Table of Contents
Federal Tax Debts and Statute of Limitations
Learning the estate planning terminology is the first step to fully grasping what happens to outstanding tax debts after your death. Let’s take a quick look at some of the key terms you’ll need to know:
- Estate: All decedent’s assets, including cash, property, or a business.
- Decedent: A deceased person who previously owned the estate.
- Heirs: Decedent’s next of kin who can legally inherit an estate if the decedent doesn’t leave a will or trust.
- Beneficiaries: A person decedent indicates in their will to receive certain assets from the estate. Unlike heirs, beneficiaries don’t have to be related to the decedent.
Suppose a decedent files a joint tax return with their spouse before their death. In that case, the spouse will pay any outstanding tax liability. However, the spouse can file an innocent spouse claim if they aren’t aware of their partner’s tax debts.
The statute of limitations for federal tax debts is ten years, and the IRS won’t forgive these debts after the taxpayer’s death.
Hence, if you filed joint returns with your partner for several years and failed to pay back what you owe, the IRS will collect the amount due from your spouse’s assets.
Heirs or beneficiaries of the decedent’s estate aren’t personally responsible for the decedent’s debts, as all taxes due should be collected from the decedent’s estate.
Filing Taxes After Decedent’s Death
The family or the estate representative must initiate probate after the decedent’s death. The process involves notifying a court of a person’s death, and its course depends on whether the decedent left a will behind.
The probate court will appoint an executor who’ll be in charge of the administration of the estate in case the estate doesn’t have a representative.
The process is usually straightforward and lasts a few months if the decedent leaves a will. In more complex cases, the probate can take over a year.
The estate executor, surviving spouse, or heir must file the decedent’s final tax return, but only if the decedent’s taxable income in the tax year when they died was over $12,500, excluding the social security benefits.
An heir or the estate’s representative must fill out and file Form 56 with the IRS shortly after the decedent’s death. The form should report the income the decedent earned in a tax year prior to their death.
Don’t forget the decedent’s spouse must pay outstanding tax liability if they filed a joint tax return for the current or previous tax years. The IRS has three years to decide if the heir or estate executor reported the appropriate tax amount on Form 56.
Filing Form 4810 will cut the tax assessment period in half, and you’ll receive the decision from the IRS within 18 months.
Paying the Decedent’s Tax Debts
All existing tax debts should be paid from the decedent’s estate before the assets are attributed to heirs and beneficiaries.
Sometimes, the IRS may place a lien on the estate to ensure that the portion of proceeds from the sales of the estate’s assets sufficient to cover the debt will go toward settling the decedent’s tax liability.
The estate’s assets can’t be used to repay other debts before the IRS receives the amount due. As noted, the IRS has ten years to collect a delinquent balance, so if you die while owning federal taxes, the IRS will initiate the collection process.
How aggressive the IRS’ collection effort will be, depends on the debt’s expiration date, as the IRS is unlikely to take aggressive collection measures if the debt is just a few years old.
However, the estate’s heirs and beneficiaries won’t have to pay the debt with their own money. It’s true even if the estate’s value isn’t sufficient to pay back federal tax, gift tax, or any other type of debt.
Tax Responsibilities of Estate’s Heirs
Any federal tax debt you may have at the time of your death will continue growing until it’s paid in full.
Although the estate’s heirs and beneficiaries are usually not responsible for paying the decedent’s tax debt, leaving unpaid liabilities behind will reduce the value of assets your heirs will inherit.
Moreover, a surviving spouse or an heir may have to pay the decedent’s tax debt under the following circumstances:
- If they have a joint bank account with the decedent.
- If they co-sign a loan with a decedent.
- If they don’t opt out of the community property system.
Moreover, estate heirs and beneficiaries who live in Nebraska, New Jersey, Iowa, Pennsylvania, Maryland, or Kentucky are responsible for paying the inheritance tax.
Estate’s executioners can be held personally responsible for the decedent’s tax debt if:
- They pay other estate’s debts before settling the federal tax debt.
- They utilize the decedent’s assets for other purposes instead of paying federal taxes, even though their value is insufficient to cover the entire tax liability.
- They attribute the estate’s assets to heirs and beneficiaries before settling the decedent’s tax debt.
The outcome of probate proceedings often determines how the decedent’s debts will be repaid, so the heir’s or estate administrator’s responsibility for the due federal taxes will depend on the court ruling.
Tax Debts of Decedents Who Don’t Leave an Estate Behind
Your immediate family members won’t have to pay an outstanding IRS debt if you don’t leave an estate behind.
In this scenario, filing a petition for probate is unnecessary because the decedent had no assets the estate’s heirs or beneficiaries could inherit.
The IRS will investigate the estate to determine the existence of collectible assets and assign the Currently Not Collectible status to the decedent’s tax account if the investigation shows that the estate doesn’t contain assets that could be used to pay the tax debt.
The debt will become delinquent after the ten-year statute of limitation expires without affecting the decedent’s surviving spouse or heirs financially.
The IRS can audit the decedent’s tax returns up to six years after their death. The agency might initiate an audit to determine the full extent of the decedent’s tax liability or if the person responsible for filing the final return fails to submit all required documents.
Nonetheless, the IRS is unlikely to initiate a collection action after the audit if the decedent didn’t have any assets at the time of their death.
Frequently Asked Questions
The IRS can collect tax debts after your death, even if you don’t have a will. Debt collection can take place during the probate process.
Only unsecured debts, such as personal loans or medical debts, are forgiven after death. All other debts, including unfulfilled federal tax obligations, are repaid from the decedent’s estate.
The estate’s heirs or beneficiaries cannot use its assets before the debt is settled. After all debts, expenses, and taxes are paid, the remaining assets are attributed to them.
The debt amount repaid to the IRS after a taxpayer’s death includes all assessed civil penalties and accrued interest from when the debt was created until it was paid in full.
Protecting Your Estate by Minimizing Federal Tax Liabilities
Life can be unpredictable, so the best we can do is to plan and keep our finances in order.
In most cases, your IRS debt won’t affect your estate’s heirs and beneficiaries because the agency will collect the amount you owe from your assets.
However, an existing debt will decrease the value of your family’s inheritance. Applying for an offer in compromise or entering an installment agreement as soon as you realize you owe taxes to the IRS will lessen the financial blow your family will experience in the event of your death.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.