If you owe back taxes to the Internal Revenue Service, but pass away before you pay it off, do not expect your debt to rest in peace. The IRS has a right to get the money you owe and will go the extra mile to collect it. They can do so if your will states that you wish your remaining cash and assets to be distributed elsewhere.
What Happens If You Don’t Pay the Debt?
The IRS mails a notice demanding payment to anyone who owes tax debt detailing how much money is owed. However, if the person who owes the debt passes away before paying off the back taxes that are owed, the IRS mails a collection letter to the executor of the decedent’s estate. The executor is an individual who is responsible for managing the deceased person’s estate and distributing the assets that are left behind.
It is important to remember that in such situations, federal tax debts take priority over other debts. The executor must pay off the IRS before he or she pays other creditors or distributes the remaining assets to heirs. Paying the IRS even takes precedence over settling your medical or funeral bills.
Liens and Spousal Liability
Also, if you owe taxes, the IRS will attach what is known as an “immediate estate lien” to your property once you pass away. While other types of liens attach only to a particular asset, the IRS tax lien will attack to all your assets. A lien essentially prohibits you from selling or transferring property and assets until to pay off the debt. However, if the executor needs to sell a particular asset to get the money to pay off the tax debt, he or she could petition the IRS to remove the lien in order to be able to do so. But, if the executor sells or transfers the property without paying the debt, the IRS could charge a penalty fee equal to the value of the sale.
There is also the question of whether your spouse can be held liable for tax debt after you die. Arizona is a community property state. This means that if you filed joint tax returns, the IRS could very well hold your spouse liable for tax debt after your death. In some cases, however, spouses can file for what is known as an “innocent spouse relief.” This could apply if the deceased person claimed wrongful deductions and tax credits without the spouse’s knowledge.
Tax Debt is Not Forever
It is important to understand that there is a statute of limitations on your tax liability. This means that under federal law, the IRS can only forcibly collect tax debts for a certain amount of time. That time limit for federal tax collection is 10 years.The clock begins to tick not on the date the tax was due, but when the IRS assessed the tax.
If you are facing tax liability after the death of a loved one, contact an experienced Arizona tax lawyer who can help you understand your options. You may have the option of buying some time to pay off the debt or you may be able to negotiate a payment plan. You may even be able to get rid of this debt by filing for bankruptcy.