What Happens to IRS Tax Debt When You Die?

Couple discuss tax debt after death

If you owe taxes when you die, the IRS will attempt to collect the tax debt from your estate. In cases where there isn’t an estate, the IRS generally won’t be able to collect the tax bill. However, if you filed a joint return with your spouse and they died, you will be responsible for the tax bill.

This can be a complicated issue, compounded by grief and the copious amounts of paperwork often accompanying the death of a loved one. At Wiggam Law, we extend our sympathies for your loss. If you contact us, we can help you file final returns, make arrangements on tax debts, and deal with any other tax issues you’re facing. In the meantime, here is an overview of the essentials.

A Decedent’s Final Tax Return

You must file a final tax return if you would have been obligated to file a tax return if you were alive. Your surviving spouse or the representative of your estate can file the return.

For example, say that you are a senior citizen with only Social Security income, and you are not normally required to file a tax return. If you die and your only income for that year was Social Security, no one needs to file a final return for you.

In contrast, imagine that you are a 50-year-old who earns $100,000 per year, and you die in the middle of the year. Even with only half a year of earnings, your income exceeds the filing threshold, and someone must file a final return on your behalf.

What Happens to Income Earned After Death?

In some cases, income earned after death is considered to be income in respect of a decedent (IRD). This should be included in your final return. For instance, say that you died suddenly, and your employer issued a paycheck a few weeks after your death. This IRD should be included with the rest of the income on your final return.

However, income earned by your estate should be reported on Form 1041 (U.S. Income Tax Return for Estates and Trusts). For instance, say that you own a rental property. You die, and the rental property passes to your estate until probate is complete. Any rent paid now becomes the income of your estate. To report that income, your executor must get an EIN for your estate, and then they should file the return. The same is true of assets that are owned by a trust after your death.

Who is Responsible for the Tax on a Final Return?

If the final return shows a tax liability due or if the person died while owing a tax debt, their estate will pay the bill during the probate process. Probate is a legal process that pays off your debts and distributes the remaining assets to your heirs.

To give you an example, imagine that when you died, you had $2,000 in your checking account, $100,000 in a retirement account, two vehicles, and a primary residence. You also owe $20,000 in tax debt and $10,000 in credit card debt.

Your estate executor will decide how to use your assets to pay off the debt. For instance, in this case, they will probably use the funds in your checking account and some of your retirement account to settle your debts. Then, the rest of the assets will go to your heirs as outlined in your will or based on state law if you don’t have a will.

What if There Isn’t an Estate?

In some cases, people’s estates don’t need to go through probate. When this happens, the estate is usually considered to be insolvent, and the debts go unpaid. This also happens when a deceased person’s assets pass outside of the probate process because of beneficiary designations.

The rules vary from state to state, but some states don’t require an estate to go through probate if the deceased person only owned assets held jointly with their spouse and vehicles under a certain value.

For example, imagine that your spouse dies and they owe medical bills, credit card bills, and IRS tax debt for a total of $30,000. Their only asset was a vehicle worth $5,000 and a home that they owned with you. In many states, this level of assets will not trigger a probate requirement.

As a result, ownership of the home passes to you, and you will need to re-title the car in your name, which you can do at the DMV with a death certificate and a marriage certificate. Then, as long as all of the above debts are only in your spouse’s name, the IRS or the other collectors will discharge them. In other words, those debts will cease to exist.

Note, however, that debt collectors don’t always play by the rules, and they often work on commission, so they tend to be a bit aggressive. If a debt collector calls you and says that you are personally liable for a debt that is just in your spouse’s name, don’t pay them unless you consult with an attorney first.

What if You Filed a Joint Tax Return?

If you filed a joint return with your deceased spouse, you are responsible for the tax debt. This is true whether you’re dealing with a final return or a return filed several years ago.

To give you an example, imagine that you filed a return in 2020 jointly with your spouse. It showed a tax liability of $20,000, and you couldn’t afford to pay it, so you set up monthly payments. In 2022, your spouse died, and you still owed $15,000 on that 2020 tax debt. Unfortunately, in this case, you still owe the tax debt. It doesn’t get reduced or cut in half because your spouse died.

That said, if your financial situation changes due to your spouse’s death, you may want to look into other options. For example, you may want to request an offer in compromise on the remaining tax liability, or you may want to apply for currently not collectible status if you can’t afford to pay anything.

Now say that your spouse died in 2022, and in early 2023, you are getting ready to file your tax returns. If you file a joint return, you will be personally liable for any tax due on the return. However, you also have the option to file separate returns. In this case, you will only be responsible for the tax debt shown on your return. Your spouse’s estate will be responsible for the tax liability on their return, and if the estate is insolvent, it is possible that the IRS won’t be able to hold anyone liable.

How to Deal With Tax Debt After Someone’s Death

After someone dies, their spouse or the executor of their estate should do the following:

  • File final tax returns if required
  • Find out how much the deceased person owes — you may need to provide a copy of the death certificate and proof of your role as executor to obtain this information
  • Work with a tax professional to figure out the best way to pay the tax debt

If you don’t proactively make a plan to deal with the tax debt, the IRS may try to forcibly collect the debt. If applicable, the agency will pursue the estate for the tax bill. If the surviving spouse is liable for the tax debt, the IRS can go after them. This may include wage garnishments, asset seizures, or other collection actions.

Innocent Spouse Relief After the Death of a Spouse

If you are being held responsible for your spouse’s tax debts on a jointly filed return, you may want to look into innocent spouse relief. This is a special IRS program designed to help people who incurred tax debts due to the actions of their spouse, ex-spouse, or late spouse.

Usually, you can only qualify if you weren’t aware of the tax liability. You also must not have had a reason to be aware. If you get approved, the IRS will absolve you of your late spouse’s portion of the tax bill.

To give you an example, imagine that you signed a jointly filed return, and you thought your spouse paid the $5,000 tax bill. However, they took that money and spent it on vacations without you. Or say that your spouse ran an underground business without your knowledge, they never reported the income on their return, and then the IRS assessed tax against them.

These are the types of situations where you may be able to get relief. However, if your spouse has an estate, the estate will be liable for the tax bill.

How to Minimize a Deceased Person’s Tax Liability

Whether you’re alive or not, you should never pay more tax than you have to. The estate or surviving spouse should contact the IRS to ask for penalty abatement. This can greatly help to reduce the amount owed.

Then, you should make sure that all of the deceased person’s returns were filed correctly. If not, consider amending old returns for refunds. With the final tax return, make sure that you claim all of the allowable deductions.

Finally, if the estate or the surviving spouse doesn’t have enough money to pay the tax bill in full, they may want to work with a tax attorney to request an offer in compromise.

Tax Liens After Death

If the IRS issues a tax lien against you, the lien will survive after your death. It will be attached to all of the assets in your estate. To get the lien released, the estate executor can pay the tax bill in full. Otherwise, if they sell assets, the IRS will be legally entitled to the funds up to the amount of the lien plus collection costs.

FAQs About Deceased People’s Taxes

What happens if a deceased person owes taxes?

Their estate becomes responsible for the tax debt. If the tax debt was from a jointly filed return, the surviving spouse becomes responsible.

What happens to IRS debt after death with no estate?

Generally, if there is no estate, that means the deceased person was insolvent. Thus, no one is liable for the tax debts.

What if a deceased parent owes taxes with no estate?

If there is no estate, then usually, no one is liable for the tax debt. However, if a tax lien was already attached to the deceased person’s assets, the lien may still be enforceable.

What if my deceased father or mother owes back taxes?

Then, the executor of their estate should pay the back taxes out of the estate. If the estate is insolvent, there usually is no need to pay the taxes. If you inherit assets with a tax lien against them, the IRS has the right to the proceeds if you sell the asset.

Get Help With Tax Issues

Dealing with tax issues is almost always stressful. Unfortunately, it can be worse when you’re also dealing with the loss of a loved one. We can reduce your stress by helping you understand your obligations and dealing with the IRS on your behalf. We can also help if you’re dealing with state tax issues.

To find the best steps forward in your situation, fill out our online contact form or call us at (404) 233-9800. At Wiggam Law, we focus on tax resolution and can help guide you no matter what tax issue you’re facing.