If you owe money to the IRS and pass away before you satisfy that debt, don't expect your federal tax debt to die with you. The IRS is still legally entitled to the money you owe and will go to great lengths to collect it – even if your will stipulates that you want your remaining assets distributed elsewhere.
Federal tax debt generally must be resolved when someone dies before any inheritances are paid out or other bills are paid. Although this may introduce frustrating time delays for family members, the IRS prohibits inheritance disbursements before federal obligations are satisfied.
Handling IRS Debt After Death
When you owe a tax debt, the IRS mails you a notice detailing how much you owe and demanding payment. If you die before paying off the back taxes you owe, the IRS will mail its collection letter to the person in charge of your estate, generally called an executor or administrator depending on state law. The executor or administrator of the estate is responsible for managing your estate and distributing any assets you left behind.
Federal tax debts take priority over other debts. The executor cannot pay other creditors, distribute cash and assets to your heirs, or even pay for your funeral or medical bills without first paying the delinquent tax debt you owe. The executor generally must also file any return you would have had to file for the year of your death.
If you owe back taxes, the IRS attaches an immediate “estate lien” to your property upon your death. Unlike other liens, which only attach to a certain asset, an IRS tax lien on a deceased person simultaneously attaches to all property you own. Property liens prevent you from selling or transferring property until you pay the debt that initiated the lien. If the executor needs to sell your home to get the money to pay the tax debt, he can petition the IRS to remove the lien so that he may do so. If the executor sells or transfers the property without paying off the lien, however, the IRS will assess a penalty fee equal to the value of the transferred asset.
If you and your spouse lived in a community property state and filed joint tax returns, the IRS may hold your spouse liable for your unpaid taxes after your death. In certain situations, spouses can file for “innocent spouse relief.” For example, your spouse is eligible for innocent spouse relief if you claimed erroneous deductions and credits without your spouse's knowledge. If the IRS approves your spouse's request for innocent spouse relief, it must focus its attention on collecting from your estate rather than your loved ones.
The taxes you owe upon death are separate from federal estate tax, which your estate may owe if you have a large fortune when you pass away.
Exceptions with the Statute of Limitations
Nothing lasts forever – even your tax liability. Federal law regulates the amount of time the IRS can forcibly collect tax debts from consumers. The statue of limitations for federal tax collection is ten years. The ten-year clock begins on the date the IRS assesses the tax, not on the date the tax was due. This limitation applies to both general collection activity and tax liens. Unlike traditional liens, the IRS cannot renew its lien for a second term. Thus, if the IRS levies a tax lien against your property after your death, your family can apply to have the tax lien removed as soon as the statute of limitations for collection expires.
2018 Tax Law Changes
The laws around tax liens on deceased people aren't changing for 2018, but estate tax rules affecting the money and other assets you leave behind are changing.
Most importantly, estates valued at less than $11,180,000 as of 2018 are generally exempt from taxation.
Tax Law in 2017
The estate tax exemption limit for 2017 is half that for 2018. It's $5,490,000. If you leave behind more than that, your heirs will generally have to file an estate tax return.
- IRS: Part 5. Collecting Process – Section 8. Estate Tax Liens
- IRS: Part 25. Special Topics – Section 4. Collection of Taxes in Community Property States
- IRS: Topic 205 – Innocent Spouse Relief (Including Separation of Liability and Equitable Relief)
- IRS: The Collection Process
- CNN: Estate Planning - Wills and Trusts
- IRS: Deceased Persons – Filing the Final Return(s) of a Deceased Person
- IRS: Estate Tax
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