What Happens to Unpaid Taxes After Death?

When you lose a loved one, the last thing to cross your mind is taxes. However, when a person passes away, it doesn’t mean their tax burdens go along with them and vanish. Uncle Sam still needs his money, so he may come knocking at your or a loved one’s door asking for his paycheck. Whether a deceased parent owes taxes, or a sibling, aunt, uncle, grandparent, or friend, you may be the one who’s tasked with handling their finances. If you’re wondering what happens if a deceased person owes taxes, we’ve got you covered. At first, it may feel overwhelming to gather all the right documentation and paperwork. But, with this step-by-step guide on hand, you’ll be able to handle the situation with ease.

What to do if a deceased person owes taxes:

Step 1: Gather the right information from the IRS

When a loved one dies, their estate isn’t automatically disbursed to the heirs and beneficiaries in his or her will. Before any income or assets are handed out, all of the deceased’s debts to creditors and the IRS must be paid off. This means someone⁠—whether a spouse, child, sibling, or representative of the deceased⁠—must be authorized to take care of their left-behind finances. Usually, the decedent will have most of their personal records handy. However, sometimes they may be missing important documents you need in order to proceed with closing the estate. To request information from the IRS, you or a representative will need to send the following documents to prove you’re legally authorized to receive their information:
  • Provide the name, address, and social security number of your deceased loved one
  • A copy of an approved Letters of Testamentary by the court, or
  • If there is no court proceeding, fill out and send IRS Form 56
  • Provide a copy of their death certificate

What are Letters of Testamentary?

When a person passes away, a court will issue Letters of Testamentary, which authorizes the executor to be responsible for the decedent’s estate. Letters of Testamentary will grant the estate administrator, personal representative, or executor the authority to take control of the deceased’s taxes and assets.

What other information will I need?

Along with a court-approved Letters of Testamentary, you may also need to obtain important documents from the IRS in order to close the estate of the deceased. To prove the existence of a relationship, you must use Form 56, Notice Concerning Fiduciary Relationship, that informs the IRS that you or a representative documented in the decedent’s will, can act on behalf of the deceased. You may also need to obtain the tax returns of your loved one to determine if they have any outstanding debts with the IRS. To get a copy of the decedent’s tax returns, you must use IRS Form 4506 and pay a fee. However, you can get Tax Return Transcripts, which are free and provide most line entry information. Finally, if you’re the estate administrator, you may need to change the decedent’s address with the IRS in order to stay in contact with the IRS. To do this, you will use IRS Form 8822, and if you’re a tax representative or estate manager, you must attach your power of attorney to change your loved one’s address.

Step 2: Designate an estate administrator

The next step to take when dealing with unpaid taxes after death is designating an estate administrator. An estate administrator is a legal representative for the deceased and their estate. Examples of estate administrators include:
  • Spouses
  • Children
  • Family members
  • Executors named in the decedent’s will
  • Attorneys
An estate administrator is in charge of a variety of responsibilities in order to fully close the decedent’s estate. General and tax responsibilities of an estate administrator include:
  • Collecting the decedent’s assets, such as property, marketable securities, and money in savings
  • Paying debts owed to creditors
  • Administering remaining assets to heirs and other beneficiaries
  • Filing income taxes for the decedent on IRS Form 1040
  • Filing an income tax return for the estate on IRS Form 1041
  • Obtaining an EIN If the decedent operated a business. For information on understanding EINs, refer to IRS Publication 1635.
  • Filing an estate tax return (IRS Form 706) if assets are transferred to heirs of the decedent. Typically, Form 706 is needed only when the estate is large.
For additional duties, refer to Publication 559

Step 3: Respond to creditors

The next duty the estate administrator is tasked with is responding to creditors who are owed money by the decedent. When a person passes away and is in debt to creditors, a petition will be sent to the creditors to notify them of the death, and will usually have around 90 days to file a proof of claim. A proof of claim documents how much money the creditor is owed, and can be obtained from the Collection Advisory group for the location of the decedent’s last address. Collection Advisory group numbers and addresses for each state can be found here.

Step 4: File the decedent’s income tax return(s)

When a person passes away, their final income tax return is prepared the same exact way as when they were alive. This means all earnings up until their death date must be reported on their federal income tax return. This also means they’re eligible for deductions and tax credits, such as the child tax credit or disability tax deductions. Additionally, if the decedent failed to file tax returns for previous years, you will have to take on that responsibility. A tax preparation service will be able to get your taxes in order and ensure all documents are filed correctly. This way, whether you need to make a payment with the IRS because your loved one owes taxes, or if you’re entitled to a tax refund, you can ensure these matters will be handled correctly.

Step 5: File an estate income tax return

Not only is an income tax return due, but two taxes on the estate are due as well. The first tax is the estate tax, which collects taxes on the transfer of assets from the deceased to their heirs and beneficiaries in their will. The second tax is the income tax, which taxes the income that is generated from the decedent’s assets from their estate. Common examples of assets that may generate income include the decedent’s:
  • Land
  • Property
  • Mutual funds
  • Stock
  • Marketable securities
  • Investment accounts
  • Treasury notes or bonds
  • Notes receivables
  • Cash on deposit and on hand
  • Certificates of Deposit
If your loved one’s estate has more than $600 in gross annual income, then you must file IRS Form 1041, and obtain an EIN by applying online, by fax, or by mail. You must also complete Schedules K-1 on Form 1041 that reports the beneficiaries’ share of the estate’s credit, income, and deductions. You can always reach out for professional tax help, or apply for a five-month extension by filing IRS Form 7004 to give you more time.

Step 6: Take care of the federal estate tax lien

Before you can sell the property of the decedent’s estate, it’s important to know that the IRS places a federal estate tax lien on the estate on the decedent’s day of death. A federal estate tax lien prohibits you from selling the estate or any of the estate’s assets before debts owed to creditors are paid off. This is all found under Internal Revenue Code section 6324. In order to discharge the lien, you can apply for a Certificate of Discharge under IRS Form 4422, with instructions found in IRS Publication 783. Along with this, you will also need to submit a copy of the will, the appraisement and inventory of the decedent’s estate assets, and any copies of documents that deal with the sale of the decedent’s property. For example, the IRS may place a tax lien of $20,000. If your grandmother passed away and her home is worth $400,000 and has an existing mortgage of $150,000, the existing mortgage will be deducted, bringing the closing fees down to $350,000. Now, the outstanding taxes will be deducted, which will leave you with $330,000 in closing costs and fees.

Step 7: Take measures against identity theft

Sadly, there are people in the world who are out to make money in malicious ways. In 2018, the Federal Trade Commission’s Consumer Sentinel Network Data Book found that there were 1.4 million fraud reports. Some of these fraud cases include the theft of deceased Americans. To avoid the identity of a deceased relative being stolen, there are a few measures you can take. These include:
  • Sending a death certification to the IRS
  • Sending a death certificate to all major credit reporting agencies so they can put a deceased alert on their credit report
  • Reviewing the decedent’s credit report to ensure there’s no suspicious activity
  • Not including the birth date, mother’s maiden name, address, or identifying information in the decedent’s obituary
If you do notice suspicious credit activity on your loved one’s report, you can find information on how to hand it at the ID Theft Center.

Final Notes

If a loved one has IRS debt after death, don’t worry about how you will manage their taxes. With tax preparation services and this guide on what happens to unpaid taxes after death, you’ll be able to close the estate with ease and get back to what’s important.