What Happens if Taxes Are Not Filed for Deceased?

by Fraser Sherman ; Updated June 05, 2018

As the deceased's executor, administrator or personal representative, you're in charge of wrapping up the deceased's affairs, settling her debts and distributing assets to her heirs. Your responsibilities include paying income taxes on the deceased's final year, plus income and estate taxes on her estate. If you as the executor fail to pay the tax and simply distribute funds to the deceased's heirs, the Internal Revenue Service can hold you personally liable for the missing money.

Priority of Creditors

The decedent's creditors are not all equal. State probate laws say that some debts get paid before others. The costs of the deceased's funeral, paying administrative expenses for the estate and paying the tax bill must be settled ahead of most other bills under the law. Heirs come at the end of the queue: If paying the deceased's bills wipes out the estate, the heirs get nothing. Some state laws make an exception to grant the deceased's family a portion of his assets to support them, but this varies from jurisdiction to jurisdiction.

Federal Tax Liens

If you don't file taxes for the decedent and the estate promptly, the IRS can file a federal tax lien requiring you pay the decedent's income tax ahead of other bills. If the deceased passed on owing more than the estate can pay, the IRS can use the lien to demand money. If the estate can't pay the debt because you spent the money on another debt, or distributed assets to the heirs, the IRS may look to you for the money.

Liability for Ignoring Lien

The IRS can hold you liable for the taxes if you knew the federal government had filed a lien but you paid the creditors or heirs off anyway. The code makes exceptions for paying administrative and funeral expenses ahead of the IRS, and for settle secured loans – those that have collateral attached, such as a mortgage. Under the law, the IRS has three years after you file to assess your liability, or six years if you under-reported the deceased's income by 25 percent or more.

Defenses for Not Paying Lien

If you can prove you had no knowledge of the deceased's tax liability when you paid the deceased's creditors or heirs, that may reduce the amount you have to pay. Some courts have held that if the taxes date back further than the year before the deceased passed on, you have no liability if you didn't know about the tax debt. If you have a valid defense, you may still have to contact the IRS to get a formal statement you don't owe the money, which means you may wish to work with a CPA or tax lawyer.

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About the Author

A Durham, NC resident, Fraser has written about law, starting a business, balancing your budget and fighting evictions, among other legal and financial topics.

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