Inheriting some or all of a loved one’s estate can give you a financial boost. But what happens if the loved one owed back taxes when they passed? Do you inherit that, too? This post covers legal guidelines and solutions for inherited tax debts.
Some debts disappear when the person who owes them dies. For example, student loans are forgiven upon submission of proof of death. Unfortunately, a tax liability is not one of these debts for the beneficiaries of an inheritance.
Instead, the amount owed will come out of the estate the deceased person left behind. Creditors may take cash or initiate the sale of property to satisfy the debt. If the estate is insolvent (has insufficient assets to pay outstanding bills and taxes), state law determines the creditors’ order of priority.
The IRS is a “super creditor,” which means the agency usually has priority over other debts. If assets remain after paying tax liabilities, they will go to other creditors. The remaining debts typically go unpaid once the estate runs out of funds.
Most estates go through probate, the legal process of handling a deceased person’s assets and liabilities. The estate executor (or administrator) is responsible for ensuring proper distribution, including filing the decedent’s final income tax return and estate taxes if required.
Courts may hold executors personally responsible for tax liabilities in the following circumstances:
If you are appointed as an estate administrator, make sure that you contact the IRS and state tax authority to understand your tax obligations. You may also want to contact a probate or tax attorney, as you have ultimate liability for wrongful distribution of funds.
The good news is that beneficiaries do not typically inherit debt directly. However, certain circumstances may obligate you to pay off the decedent’s financial liabilities. These include the following:
There are not many legal solutions for avoiding inherited tax debts. But since most beneficiaries are not personally responsible for loved one’s debts, you aren’t likely on the hook for paying their back taxes.
However, if you are an heir to an estate, tax liabilities can reduce your eventual inheritance amount. If you’d like to keep inherited property the IRS may claim, you can ask for a partial payment installation plan. Alternatively, the agency may be willing to accept less than the total with an offer in compromise.
The one thing you shouldn’t do is pretend the tax liability doesn’t exist. The IRS can collect debts for up to 10 years and may add accumulating interest and penalties.
If you need solutions for inherited tax debts or other tax troubles, contact Levy & Associates today. Our team includes attorneys, CPAs, and former IRS revenue officers to help you resolve your issue as effectively as possible. Call us at 800.TAX.LEVY or contact us online 24/7.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.