Death and Tax Debt

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Death ends many things, but not tax debt. If a taxpayer owes taxes to the IRS, death will neither affect the tax debt or the IRS’ collection efforts. The IRS is known to pursue a tax debt from the children or close relatives of the deceased. If the children of the deceased debtor cannot pay the tax debt, the IRS tries to collect taxes from close relatives. Even though death of a parent is not the time to think about taxes, it is important to know the tax laws pertaining to it so that you can protect yourself using your rights.

The Executor and the Distribution of Wealth

If the deceased person left a will, the will should name the executor and also the people to whom the assets of the deceased are to be distributed. It is the responsibility of the executor to inform the creditors about the death. If there is a debt, the executor must pay the debt out of the assets and property of the deceased. The IRS requires the executor of the will to pay the full amount of tax debt of the deceased before the deceased’s assets are distributed in compliance with the will. This rule must be followed even if the deceased set up a trust for the assets. In case of a larger debt that cannot be paid by the cash left behind by the deceased, the assets are liquidated to fulfill the debt.

When the creditors are being paid, the IRS is always the primary creditor, which means that the deceased’s tax debt owed to the IRS must be fulfilled in entirety before other debts are fulfilled. It is only if the IRS gives explicit permission to allow other creditors to move forward with their debts that the tax debt can be paid secondarily. Whenever the liquidation of assets takes place, secured debts are paid before the unsecured debts.

Paying of Estate Taxes

To pay the estate taxes, the executor of the will must file a separate tax return and pay the estate taxes owed. These are different from income tax. If the estate assets are being transferred to the surviving spouse, then the IRS does not require the estates taxes to be paid. Apart from this exemption allowed to the surviving spouse, the IRS does not collect estate taxes from the spouse, children or any family members of the deceased unless the tax is not paid before the executor of the will distributes assets to the beneficiary/beneficiaries.

The Surviving Spouse

If a spouse dies, then the tax debt owed by the deceased passes over to the surviving spouse. The surviving spouse is also required to file a joint tax return for the year in which the death occurred and pay any back taxes owed by the deceased spouse.

If the surviving spouse was not aware of the tax debt owed by the deceased spouse, then the surviving spouse may claim relief from tax debt using ‘innocent spouse relief’. Under the innocent spouse program for tax debt relief, a spouse (irrespective of whether their partner is living or dead) can claim that they had no knowledge of the tax debt and had no reason to know about the tax debt, and must, therefore, not be held responsible for the payment of the tax debt.

IRS Collection

If the executor of the will fails to pay the tax debt owed by the deceased, then the IRS will contact the beneficiaries of the will for the collection of back taxes. Essentially, the IRS will contact and try to recover the taxes owed from anybody closely related to the deceased, legally or otherwise, whether it is the executor of the will, the children of the deceased or the beneficiaries of the will.

From the author: Tax Resolution Legal Team
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