Nobody wants to deal with death or pay taxes. So when someone dies with an unpaid IRS tax bill, it can be an especially troubling, painful, and uncomfortable time for those who have to deal with this situation. Luckily, unpaid tax bills do not pass from a decedent to surviving family members except in the case of a spouse who filed a joint return with the decedent, but there are nuances and exceptions to this general rule which are discussed below.

When it comes to dealing with unpaid taxes, many questions may come up, such as if the IRS is allowed to collect the balance and if so, who has to pay it and how. The purpose of this article is to address those questions, as well as discuss a few others that are likely to arise when resolving the tax obligations of the recently deceased. 

Who Is Responsible for the Deceased Person’s Tax Debt? 

In most cases, it will be the decedent’s (the person who died) estate or the decedent’s surviving spouse that is legally responsible for paying the outstanding tax balance. The surviving spouse will usually be responsible for the unpaid taxes only if that tax debt stems from a jointly filed tax return. This is because each spouse is jointly and severally liable for the other’s tax liabilities. So if a couple owed the IRS $1,000 in taxes and one spouse dies, instead of trying to collect from both spouses, the IRS will attempt to collect from the surviving spouse.

In cases where the taxpayer dies with their estate paying their taxes, who is the person responsible for actually sending the tax payment to the IRS? It will be the estate’s executor, administrator, or other legal representative of the estate. To better understand how this works, we need to understand how probate works. 

What Is Probate? 

Probate refers to the process where a court assigns a legal representative to handle any outstanding bills and debts of the deceased and distribute any property under the terms of a will (if there is one) or the state’s intestate laws (laws that decide who gets what when someone dies without a will). To be clear, the executor doesn’t use their own money to pay the bills, but money from the deceased’s estate.

If there’s cash in a bank account, they’ll have authorization to use that money to pay any debts or bills, such as credit card balances, funeral costs, and IRS debts. If there’s not enough cash, the executor may sell some of the deceased’s assets and then use the proceeds to pay off any debts or bills. Only after these debts are paid will any remaining property get distributed to heirs as outlined by the will or intestate statute.

This is a fairly straightforward, yet necessary process. If done properly, no heirs or surviving family members will need to worry about being on the hook for the decedent’s tax bills. However, if done wrong, one or more financial decisions could lead to unexpected or unintended tax problems. 

What Does the Executor Need to Do During Probate Concerning the Unpaid Taxes? 

There are two main tax-related tasks for you to handle if you’re the executor of the deceased’s estate. First, you need to contact the IRS and file a request for a proof of claim. When someone dies, creditors (including the IRS) may have the right to file a claim against the deceased’s estate for payment of an existing debt or bill. To assert this right, a creditor must usually file a proof of claim with the probate court. It’s normally your responsibility to alert creditors that someone who owes them money has died. You provide this notice so they know to file a proof of claim if they want to collect anything against the decedent’s estate.

Two, you must file any necessary tax returns on behalf of the deceased. There may be up to three types of returns needed. These include an:

• Income tax return of the deceased;
• Income tax return of the deceased’s estate; and/or
• Estate tax return.

Most likely, you’ll need to at least file the decedent’s income tax return. This will be their final tax return, although you may need to file additional income tax returns if the deceased died with unfiled tax returns from prior years. Depending on the age of the deceased, you’ll use either IRS Form 1040, U.S. Individual Income Tax Return or IRS Form 1040-SR, U.S. Tax Return for Seniors. Neither of these returns will be needed if, at the time of death, the decedent didn’t have any income or assets that were reportable to the IRS, however.

If the deceased’s estate has assets that generate more than $600 in a year, then you’ll also need to file an income tax return for the estate using IRS Form 1041, U.S. Income Tax Return for Estates and Trusts. If you’re administering a large estate (such as one worth more than $12.9 million), you may also need to file an estate tax return using IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. The purpose of this return is to determine the estate tax the deceased’s estate may owe under Chapter 11 of the Internal Revenue Code.

If you’re unsure about what tax returns you need to file, it’s a good idea to consult with a CPA or tax attorney to discuss these filing obligations. There could also be estate tax planning strategies you could use to minimize the taxes owed to the IRS, leaving more money for the deceased’s heirs. 

What If the Decedent Dies Without an Estate? 

Dying without an estate typically means dying with more debts than assets or with assets under a certain value. If you don’t have an estate, your heirs don’t have to go through probate, but the thresholds vary from state to state. When someone dies without an estate, their unpaid taxes can sometimes go away. 

What If There Is a Tax Lien Against the Decedant’s Assets?

However, if the IRS had a tax lien on the decedent’s property before they died, the IRS may be able to enforce that lien, even after death. For example, say that the IRS issued a tax lien several years before the death, and it attached to all of the person’s assets. When they died, they had a vehicle that was paid off, but a tax lien was attached to that vehicle. 

The lien will stay attached to the vehicle, even if the vehicle passes to one of the decedent’s heirs. Then, if the heir decides to sell the vehicle, the proceeds of the sale (up to the value of the lien) will go to the IRS. Similarly, if the heir decided to take a loan against the vehicle, the lien would entitle the IRS to the proceeds of the loan up to the value of the lien. 

How to Avoid Paying More Taxes After Someone Dies 

The best approach is for the deceased to create a tax plan before their death. While they’re still living, they can employ certain tax avoidance strategies to reduce any taxes owed to the IRS when they pass away. After the individual dies, there are still ways to reduce the amount of money paid to the IRS, but they’re more limited. 

If you do not have enough cash in the estate to pay for the decedent’s final tax liability, you may want to request a short-term payment arrangement with the IRS. This gives you 180 days to pay the tax liability. Generally, the IRS will not consider a long-term payment plan on the tax liability, unless there is a situation where the estate doesn’t have a lot of liquid assets and settling the estate is likely to take some time. You may be able to apply for an offer in compromise to settle the tax bill for less than owed, but typically, the IRS will only accept this type of arrangement if all of the assets in the estate are out toward the offer. 

Note that when considering these options, the IRS will carefully examine the assets and other liabilities of the estate to determine how it can collect the most money in the most efficient way possible. For instance, if the IRS concludes they could get more money from the estate through the probate process, they’ll likely reject an OIC request.

Regardless of the situation, if you’re administering an estate, it’s strongly recommended to consult with a tax pro to identify potential tax tips to take advantage of and pitfalls to avoid. 

Unpaid Taxes After Death FAQs

Are Survivors Ever Personally Responsible for the Tax Bills of the Deceased? 

In most cases, the IRS can only collect unpaid taxes from the deceased’s estate. And if there’s not enough money there to pay off the tax bill, then the IRS cannot go after the executor or surviving family members for the difference. There are a few exceptions to this, including situations where:

• The unpaid tax bill stems from a tax return filed jointly by a married couple and the decedent’s spouse is still living.
• The unpaid tax bill stems from a married filing separate tax return, but the surviving spouse lives in a community property state.
• The executor knows of the unpaid taxes, but instead of using the estate’s assets to pay the taxes, distributes the assets to the heirs. In this situation, the executor could be personally liable for the decedent’s unpaid tax bill if there isn’t enough money in the estate to settle the tax obligation. 

What if My Spouse Dies and Leaves Behind a Tax Bill I Wasn’t Aware of?

If you discover that your late spouse had unreported income or unfiled returns and you’re facing an unexpected tax bill due to their actions, consider talking with a tax attorney about innocent spouse relief. This program may be able to absolve you of your late spouse’s tax liability if you did not know about the unreported income and had no reason to know about it. However, if you qualify, you will still be responsible for the tax liability connected to your individual income. 

Can the IRS Audit the Tax Returns of Someone Who Has Died? 

Yes, as the IRS has the legal right to audit tax returns from the past six years (although they usually only focus on auditing returns from the past three years). Also note that if the IRS is in the middle of an audit when the taxpayer dies, the IRS can choose to continue with the audit. 

What Happens if the Deceased’s Unpaid Taxes Aren’t Paid? 

If the IRS decides to collect the unpaid taxes from the deceased, and the deceased estate doesn’t pay them, the IRS may use most of their tax collection tools against the estate or surviving spouse (if applicable), including wage garnishment, bank levies, and tax liens. And just like unpaid taxes with a person who’s still alive, penalties and interest can continue to accrue on an unpaid tax balance. Finally, the executor could become personally liable for the taxes if they disbursed the estate’s assets to heirs despite knowing about the IRS’ tax claims against the estate. 

Need More Information About What Happened If a Deceased Person Owes Taxes? 

Figuring out taxes after someone dies can feel like the IRS is adding insult to injury. It’s a sad time that could become confusing because of the tax questions that might arise when probating the deceased’s estate. If you’re unsure about how the IRS handles tax collection from taxpayers who have just died, contact Damiens Law for a free consultation. We have years of experience with tax planning and estate tax issues, including how to deal with the IRS during the probate process.