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You’ll have no time to think about tax debt when your loved one dies. However, the IRS debt won’t go away. It needs to be addressed at some point.
The question now is who is responsible for IRS debt after death? The decedent’s (deceased person) estate administrator or executor will be responsible for paying off the IRS debt, using the remaining money and assets of the deceased person.
What is the Responsibility of the Estate Administrator?
If the decedent left a will, it will contain the name of the person who will take on the role of estate administrator or executor. The will should also determine the people who will receive the assets left by the decedent, which may include income received after death.
If the deceased parent owes taxes, it’s the executor’s job to pay the full amount before the assets are distributed to the heirs as indicated in the will. If there’s not enough cash to cover the debt, the decedent’s assets/properties will be liquidated in order to fulfill the tax debt.
If there’s no will, someone, perhaps a relative or a close friend, may request the probate court to allow them to settle the estate. After the court has appointed an executor, the latter will be responsible for collecting all of the decedent’s assets and make sure that debts are paid (tax debts first) before the remaining assets are distributed to the heirs.
The executor also needs to file a separate tax return and settle any unpaid estate taxes. These only apply if the deceased was a resident of or owns properties in the District of Columbia and 12 states including Illinois, Massachusetts, and Oregon. The tax is only applicable to estates that are valued at more than $11.58 million. This federal estate tax exemption will remain until 2025. Unless Congress renews it, the exemption will be dropped down to $5 million.
How Will the Estate Administrator Know if the Decedent has Tax Debt?
The estate administrator needs to check the decedent’s personal records to find out if the deceased has filed all of their income tax returns. The executor may also ask the IRS for help in determining whether the decedent’s income taxes are updated or not.
However, the IRS won’t just give out the information. The executor needs to prove that they’re authorized to obtain the information. They must meet the following requirements:
- Request a copy of the decedent’s tax returns
- Provide the decedent’s full name, Social Security number, and address
- Provide a copy of the death certificate
- Provide a copy of the Letters of Testamentary (letter from that court saying that the executor is authorized to represent the deceased)
- Complete the IRS Form 56
Searching public records may also reveal if the IRS has placed a Notice of Federal Tax Lien on the assets of the deceased. The payment for the tax debt will be taken out from the proceeds once the decedent’s assets are sold. The sale of the property and the payment for the tax debt will be handled by the executor or estate administrator.
Do the Decedent’s Relatives Need to Pay Off the IRS Debt Using their Personal Funds?
No. The relatives of the deceased individual who has a tax debt are not required to pay it off using their personal funds. This also applies even if the decedent has insufficient funds to cover their debts including federal tax debt. The decedent’s friends and family may not be vulnerable to tax collections but the property and the money that’s left behind by the deceased individual will be.
The decedent’s assets will be used to pay off the IRS debt and any remaining assets will be allocated to the decedent’s heirs.
What are the Instances Where Loved Ones are Required to Pay the IRS?
By default, the relatives of the deceased individual have no liability when it comes to paying off the decedent’s IRS debt unless:
If a relative doubles as the estate executor or someone else acts as the executor, that person will be solely responsible for the tax bill if he/she does any of the following:
- Distributes assets to beneficiaries and heirs first before paying the tax debt
- Settles other debts first before the tax debt
- Spends the assets even with the knowledge that the deceased individual left insufficient funds to pay off the debt they left
The heirs of the decedent’s estate may also be required to pay an inheritance tax. Only six states including Iowa, Maryland, and Pennsylvania collect inheritance taxes. Surviving spouses are exempt from paying inheritance taxes in all six states. The inheritance tax is based on the percentage of the inheritance’s value.
What are Innocent Spouse Relief and Separation of Liability Relief?
The IRS may hold the spouse liable for the decedent’s unpaid taxes if they lived in a community property estate and filed joint tax returns. The spouse may file for innocent spouse relief (allows a taxpayer to seek relief from a tax obligation that may have been a result of their spouse’s underpayment of tax or errors made by their spouse on a joint return) with the IRS and if approved, the unpaid taxes will be collected from the decedent’s estate rather than the surviving spouse.
Another option is the separation of liability relief. With this type of relief, a taxpayer can request relief for a tax debt that resulted from the understatement of taxes. You can ask for the separation of the understatement of taxes from the joint tax return that the taxpayer and the deceased spouse have filed.
If the relatives live in states, such as Pennsylvania, Kentucky, New Jersey, Nebraska, Maryland, and Iowa, they may be required to pay a federal inheritance tax for the assets they inherited from the decedent’s estates.
If the relatives are beneficiaries of the decedent’s Income in Respect of a Decedent assets, such as 401(k)s, then the money they receive will be taxable.
How Long Can the IRS Collect a Tax Debt?
A federal tax debt will have a lifespan of 10 years and the clock starts during the assessment date. During this time, the IRS will continue its collection efforts, including putting a levy on bank accounts, wage garnishment, or property seizure.
Death isn’t an excuse for the IRS to excuse a tax debt. It will continue its collection activity on the delinquent balance until it reaches its expiration (10 years from its assessment date). Once the 10-year limit has passed, the IRS cannot renew the tax lien against the decedent’s property. The relatives of the deceased can ask for the tax lien to be removed once the 10-year limit is reached.
When a person has a tax debt, the IRS will send them a letter, which details how much is owed. If that person dies, the IRS will send the letter to the estate administrator or executor. The latter can also take the proactive approach and check with the IRS if the decedent is updated or not with their income tax returns. The executor may also contact the local Taxpayer Assistance Center to find out how much tax debt after death is owed.
When Should the Tax Debt be Settled?
Keep in mind that federal tax debts always come first when it comes to paying off the decedent’s debts. It also takes priority over the distribution of assets and cash to the heirs. Upon the person’s death, the IRS will immediately attach an estate lien (right to keep possession of an asset and prevent the sale or transfer of a property until a debt is paid off or discharged) to all the decedent’s property, including land, houses, furniture, vehicles, as well as financial investments. A federal tax lien can be attached to both probate (assets left by the decedent that needs to go through probate court) and non-probate (assets that don’t need to go through the probate process) property.
If the executor needs to sell the asset to pay the tax debt, a petition to remove the lien must be filed to the IRS. If the executor sells the property without paying off the estate lien, the IRS will determine an appropriate penalty fee that’s equal to the transferred asset’s value.
Dealing with the death of a loved one is difficult enough and taking care of the deceased’s tax debt will be the last thing on your mind. But it needs to be addressed eventually. The executor or estate administrator will be responsible for paying off the debt of the decedent including the IRS debt.
Settling the tax debt should be done before paying off other debts or distributing the assets to the heirs. The money and the property of the decedent will be used to pay off the tax debt. The spouse, relatives, or friends will not be liable unless they co-signed for a loan or had a joint account with the decedent. The surviving spouse may be required to settle the unpaid taxes if they lived in community property states or if they filed a joint tax return.