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What Happens To IRS Debt When You Die?

Are you wondering what happens to the tax debt of a loved one after their death? Unfortunately, any outstanding amount owed isn’t “automatically” wiped clean from the record when a taxpayer passes away.  In this post we’ll discuss the general process and give you some tips on how to navigate some of the difficult steps one may encounter.

The role of the executor of the estate.  When a person dies, someone may apply to the court requesting that they be allowed to settle the estate.  This person could be an heir or the executor of the estate, and is referred to as the estate administrator.  Once they have officially been appointed by the probate court, Letters Testamentary are issued to authorize them to act on behalf of the deceased.   The estate administrator is responsible for collecting all of the deceased’s assets such as cash, bank accounts, investment accounts, personal property and titles to real estate.  They then will ensure that all creditors are paid and then distribute the remaining assets to the heirs.

For example, if you are the estate administrator when your father or mother passes away, you can’t simply distribute their assets to the people named in the will immediately. First, you need to pay off any debts your parent owed at the time they died.  If that parent owed taxes to the IRS, they will be included in the debts that must be paid.

Income generated before and after date of death.  Sometimes, loved ones may be confused as to what must be included on which tax return.  Here, we hope to add some clarity.  Income earned up through the date of passing is included on the taxpayers final Form 1040.  Any income generated after the day of death is earned by the deceased’s estate.

Filing of tax returns.  The estate administrator is the person who is responsible for ensuring that all income tax returns for the deceased have been filed.  This includes the final income tax return for the year of death. In this post on our sister site, we discuss how to file a deceased persons tax return.

To find out whether the deceased filed all income tax returns before his death, the estate administrator will have to look through the deceased’s personal records.  They can also request information from the IRS to not only check return status, but get missing data (i.e. W2s, 1099s, 1098s, etc) needed to file returns.  Check this page on the IRS’ website to learn more and request data.

If the estate earns money that is taxable, either from interest, dividends or rental income, these taxes are paid from the estate.  According to the IRS, an estate administrator must file an income tax return for an estate if its assets generate more than $600 in income per year.  This is done via IRS Form 1041.

IRS taxes owed at date of death.  After you review the deceased’s personal papers and correspondence or you file any outstanding income tax returns, you may discover that your loved one still owes taxes to the IRS.  A public records search may reveal that the IRS has already filed a Notice of Federal Tax Lien against the deceased’s home, vacation property, car or other property. The tax lien is official notice that the deceased owes back taxes. The outstanding amount will be deducted from the proceeds of their remaining assets to pay their taxes.

Do relatives have to settle unpaid taxes with personal funds?  When a decedent’s assets are insufficient to cover his/her federal income and gift tax liabilities, relatives are generally not responsible for the remaining balances. However, there are some exceptions to this.  There are payment obligations for the following individuals when tackling a decedent’s debt:

  • Anyone who co-signed for a loan with the decedent,
  • Anyone who was a joint account holder with the decedent,
  • Spouses in the community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.  Community property from a marriage can be put toward debt obligations, but spouses aren’t responsible for debts that predate the marriage.
  • Residents of states where law requires a surviving spouse to pay off some of the debts—namely health care expenses, and
  • Anyone who shares in any debt of the decedent

Additionally, an executor could be held personally accountable for the tax bill if:

  • The executor distributes assets to heirs and beneficiaries before paying the taxes,
  • The executor pays off other debts of the estate before paying the tax liabilities, or
  • The executor is aware of the insufficient funds and inability to pay the taxes and spends the assets otherwise.

If you still need more information on this topic, feel free to see the Deceased Persons – Probate, Filing Estate and Individual Returns, Paying Taxes Due page at the IRS’ website.