Is IRS Tax Debt Forgiven at Death?
If you are looking after the affairs of someone who has passed, you are likely swamped with details and decisions. If you’ve recently lost a parent, there is plenty on your mind and on your plate. Once you’ve managed funeral arrangements and a groundswell of communication, there are logistical, legal and financial details to resolve. It may take some time before you work your way through to taxes, but as soon as you do, you’ll have plenty of questions related to the Internal Revenue Service (IRS). Perhaps most pressing, if you’re like many taxpayers, you’ll be wondering, “Is IRS tax debt forgiven at death?”
In other words—Am I responsible for my parents’ tax debt? The answer is both yes and no. Here, we’ll take a closer look at how IRS tax debt is handled when someone passes away and what you can do to protect your rights.
An Heir to Debt?
In the United States, debts are not passed along to heirs. As this includes IRS tax debt, it means that you cannot directly inherit any of your parents’ unpaid tax bills. While there are exceptions for surviving spouses, children who inherit their parents’ estates will not be forced to pay their tax debt.
But, if you are the child of a deceased parent with IRS tax debt, don’t assume you are free and clear just yet. After all, the IRS has a way of finding the money they think they are owed. Before any money or assets can be distributed to beneficiaries of the estate, tax bills must first be settled.
The IRS, much like a funeral home, is considered a super creditor for the estates of deceased taxpayers. This means the executor of a will needs to first pay off things like funeral bills and any unpaid taxes before the proceeds of an estate can be dispersed.
Perhaps you are in the role of executor yourself. If so, you have significant personal responsibility. It’s your job to keep track of records and pay outstanding bills, including IRS tax debt, before any remaining funds are dispersed to beneficiaries.
So, what are the first steps to take, if you’re an executor of your parents’ will? Let’s take a closer look.
Support for Executors
If you’ve been appointed executor or administrator of your parent’s estate, you have an important job to do. Not only will you resolve your mother or father’s physical and financial assets, but you’ll need to manage the communication and expectation of other family members, too.
But before you can give anyone real information about the amount they may inherit, you need to first perform your due diligence. As executor, you need to assess all debt claims on an estate before it is distributed.
While some creditors may not bother to pursue money they are owed through an estate, the IRS is both persistent and diligent. If they think they are owed any tax debt, they will pursue it aggressively. They do not need to go through the same logistical and legal hoops as other creditors, making it even easier for them to pursue IRS tax debt.
As an executor, you don’t want to be on the wrong side of the IRS when they are in pursuit of back taxes. If you proceed to distribute the estate without managing the taxes owed to the IRS, it is considered wrongful distribution. The consequences can include financial penalties, interest charges and ultimately, legal liability.
In other words, if you are the executor of an estate, even if you don’t think the deceased owed back taxes, it is worth checking with the IRS to make sure this is the case. When you ask about outstanding IRS tax debt, you may find you are free to go ahead, there may be a portion of back taxes owing, or there may be so much IRS tax debt that the beneficiaries will receive nothing at all.
Check for Exceptions
Another thing to keep in mind about IRS tax debt is there are always exceptions to the rules. Many can act as pitfalls, even when you strive to do the right thing as an executor. It is important, for example, not to assume that state tax laws work the same way as federal laws. Some states will lay more claim to tax debt, following the death of a taxpayer. After you check if there is any IRS tax debt on the estate, be sure to look into any state taxes owing, as well.
There are exceptions to the way the IRS works, as well. As an example, if your parent left you a house in their will but they had significant IRS tax debt, to the point that the IRS would seize the home to pay back taxes, you might worry that you wouldn’t be able to keep the house. In some cases, the IRS will allow you to keep the home, in exchange for an installment agreement, that would ultimately pay the taxes off.
While you will have plenty on your mind after your parent passes, it’s important to keep a clear head. The IRS is assertive about pursuing tax debt, but there are exceptions that can work in your favor. Perhaps the best way to make your journey as smooth as possible is to find the right tax professionals to help.
The Perfect Time to Find Help
If you are the executor or administrator of an estate, you may find yourself overwhelmed by both the emotion and the magnitude of the job itself. Even if you feel confident in your role, if your parents owed IRS tax debt when they passed, it is important to seek professional advice.
Not only can tax experts help to outline your options and explain your situation, but they will also negotiate with the IRS on your behalf, should you need the support. Experienced tax professionals will help ensure your peace of mind and the most direct route to resolve the estate of your loved one.
Naturally, the process of looking after your parent’s estate may leave you wanting to clear your own affairs, so you don’t pass IRS tax debt to your children. As we’ve seen, outstanding tax debt can complicate your estate and limit the amount of inheritance your children will receive. If you owe back taxes, a team of tax experts can help you make a plan to get rid of them, once and for all. In other words, whether you are settling the estate of a loved one or getting your own affairs in order, you don’t have to face the stress of IRS tax debt alone.
At Franskoviak Tax Solutions, we have helped thousands of clients with tax planning for more than 30 years. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach. Speak to our team about personal and business taxes, IRS tax deadlines, payroll taxes, IRS tax relief and tax problems such as IRS tax notifications, payroll tax debt, delinquent taxes and more.
Start with a free consultation—we’re here to help you understand and dispose of IRS tax debt, whether your own or the money owing through an estate settlement.
