Will Your Loved Ones Inherit Your Tax Debt?

Will Your Loved Ones Inherit Your Tax Debt?

• Apr 29, 2022

There’s a saying that the only things certain in life are death and taxes. But what if you pass away with a tax debt attached to your name? How does your tax debt impact your loved ones, if at all? Will they be held liable for what you owe? In this way, death and taxes can feel anything but certain. Here’s what you need to know about how tax debt impacts your estate and your heirs.

Understanding the Statute of Limitations

First, it’s important to understand that all tax debts of a statute of limitations. Delinquent federal taxes have a lifespan of ten years in which the IRS can collect them. This clock starts ticking on the date that your tax debt is assessed, and ends exactly ten years later, at which point the IRS can no longer take any collection actions on the debt—whether that’s against you or your heirs. There are certain circumstances in which this lifespan can be extended, but it’s far more common that the statute of limitations on your tax debt will be expired in one decade from the date of assessment.

With that being said, if a tax debt is still attached to your account with the IRS at the time of your death, and that debt is still considered collectible, it can have some impact on your heirs.

Your Spouse Is Liable for Joint Tax Debt

If you filed joint tax returns with your spouse, and those returns resulted in a tax debt, both of you are considered equally responsible for the balance. If you pass away before the debt is paid, your spouse still remains liable for the debt and will be subject to ongoing collection efforts from the IRS.

If your tax debt was tied to an individually filed return (for example, on a return filed before you were married), of if your spouse had no knowledge of filing errors that led to the tax debt, they can request innocent spouse relief from the IRS. If their request is approved, the IRS will not pursue collection against your spouse.

Tax Debt Is Not Directly Inherited

While your spouse would remain liable for joint tax debt, your heirs will not be subject to IRS collections for your tax debt after you pass away. Tax debts cannot be directly inherited, and the IRS cannot hold others responsible for what you owe in back taxes.

It Can Impact Your Estate

Even though your heirs won’t be directly saddled with your tax debt after you pass, that doesn’t mean it won’t impact them. They can still experience major financial losses to your tax debt in the form of asset seizure. The money or property you intend to leave to your loved ones can be seized by the IRS to settle your debt. According to federal law, any outstanding tax debt must be paid before your assets can be divided among your heirs.

So, if you have a large tax debt and a modest estate, your heirs could, ultimately, be left with no inheritance at all. This can be just as financially devastating to your loved ones as being held directly liable for your tax debt. They may be left with very few assets with which to settle your affairs and support themselves through the grieving process.

After your tax debt is settled, whatever remains of your assets will be divided among your heirs based on your will—or as near to your will as possible, given the assets that were seized by the IRS. If your debt exceeds the value of your estate, the remaining debt would be written off, and not passed on to your heirs. However, naturally, this means that your heirs would be left with no part of your estate.

Settle Your Tax Debt to Protect Your Estate

Many people carefully plan for their last estate to ensure that those they love are properly provided and cared for. If and when you pass away, you want to have the peace of mind that those you leave behind have a secure financial foundation. That’s simply not possible if the inheritance you planned for them is taken by the IRS.

Settling your tax debt now protects your estate, ensures your last wishes can be fully carried out, and helps to provide for your loved ones’ futures. If you have outstanding tax debts, contact the IRS Advocates today to get help settling it, so your estate goes to your heirs instead of to the IRS.