Dying and Owe Taxes to the IRS: What Are My Options?

If you’ve recently learned that you may be passing away soon, worrying about taxes is probably the last thing on your mind. What’s probably near the top of your list is making sure your loved ones are taken care of when you’re gone. But if you owe the IRS money, the burden of your unpaid taxes could fall on those close to you. Your tax problem may become their tax problem if you don’t make proper arrangements before you die.

The goal of this blog post is to discuss what those arrangements can be, including how the IRS treats unresolved tax issues with someone who has recently died. If you’d like to learn more, Seattle Legal Services, PLLC can help. We offer both estate planning and tax resolution services. You can schedule a consultation by calling 425-428-5262 or using the online contact form.

Key Takeaways

If you die with outstanding tax debts, the IRS can still try to collect that debt, but only from your estate, not from your heirs.
Although your estate is responsible for the tax bill, that can still mean fewer assets for your heirs if the IRS seizes your assets.
It’s best to make tax settlement arrangements before you die to limit what the IRS can take from your estate and maximize what you leave for your loved ones.
To deal with unresolved tax issues before dying, consult with a tax attorney who has tax resolution and estate planning experience.

What Happens to a Deceased’s IRS Tax Debts

Even after death, outstanding tax balances must still be paid. In other words, a deceased person can still owe taxes to the IRS. But once they’re deceased, the IRS gets paid through the decedent’s estate.

When a person dies with a tax debt, it becomes part of their estate. An estate consists of all assets and debts that contribute to the decedent’s net worth. Any positive equity in those assets can be used to pay off any debts that existed at the time of death, such as IRS tax bills. An administrator or executor (of your choosing) is tasked with overseeing this process and ensuring all debts are paid before your assets are distributed amongst your heirs.

For example, imagine someone dies with a home worth $200,000 subject to a $100,000 mortgage. They also have $5,000 in a bank account and a fully paid off car worth $15,000. Finally, they have an unpaid credit card balance of $1,000, an IRS tax debt of $10,000, and personal belongings, including clothing and furniture. In this example, the estate consists of their:

Home
Home’s mortgage
Bank account
Car
Unpaid credit card balance
Personal belongings
IRS debt

But before anyone can inherit anything, the debts need to be settled or assumed (taken over). For example, if they left their home to their only child, the child would get the home, but would need to continue making the mortgage payments. Alternatively, they could sell the home, use the proceeds to pay off the mortgage, then keep the remaining $100,000.

The estate would also pay off the credit balance and IRS tax debt using assets within the estate. In this example, the executor or administrator of the estate would likely start by using the money in the bank account.

This is enough to pay off the credit card, but there’s not enough left for the IRS. The remaining money must come from the rest of your estate, such as the vehicle or personal belongings. This would likely require the sale of those assets. This may not be a big deal if neither holds any special meaning to the heirs. But things are a bit different if there are family heirlooms passed down multiple generations, or the car has sentimental value.

Bottom line: your heirs aren’t typically on the hook for your unpaid tax debts, but any unpaid tax amounts that exist when you pass away will likely affect how much your heirs receive.

Legal Tax Resolution Options To Use Before Death

As you can see from the above hypothetical, dying with unresolved tax bills with the IRS can have unintended consequences for your heirs, even if the assets of your estate easily exceed any debts.

Now imagine what happens if your tax debt is greater than the assets you hope to leave behind. Without sufficient planning, it’s possible for those surviving you to get nothing and the IRS everything. To help prevent this, there are several options to consider.

Offer in Compromise

An offer in compromise (OIC) lets you settle tax debt for less than the full amount. If you’re able to get the IRS to accept your offer and you pay it in full before you die, then the IRS won’t file a claim against your estate.

If payments are still required for the OIC when you die, then there are two possibilities. The first possibility is if you have an estate with assets that the IRS can potentially go after. In this situation, the IRS may try to get the rest of your tax debt paid from the proceeds of your estate.

The second possibility is if you have no estate with assets, the IRS can try to recover. If this happens, the IRS will generally mark the OIC as satisfied and not engage in further tax collection actions.

It’s usually best to submit an OIC and have it accepted before passing away. However, it’s possible for your estate to submit an OIC for your tax debts after you’ve died.

Currently Not Collectible Status

Currently Not Collectible (CNC) status means the IRS agrees to temporarily pause its collection efforts because the taxpayer isn’t financially capable of paying for both basic living expenses and making tax payments. In other words, the taxpayer is in such poor financial health, the IRS can’t expect the taxpayer to even make the most minimal tax payments for the foreseeable future.

CNC status isn’t the greatest option, as penalties and interest continue to accrue, and the tax debt doesn’t go away. Therefore, the IRS can file a claim against your estate after you die. However, it can buy some time for you to figure out what to do next concerning your taxes.

Installment Agreement or Payment Plan

An installment agreement (long-term payment plan) allows you to make monthly payments on your tax debt. But, if there’s still a balance due when you pass away, the IRS may file a claim for the remaining balance from your estate. Also note that the IRS may file a lien against your assets during the course of the installment agreement.

Despite these drawbacks, an installment agreement can be helpful in that it stops IRS collection actions while you’re still alive. It can also reduce the amount your heirs have to pay by the time it’s time to probate your estate.

Partial Payment Installment Agreement

A partial payment installment agreement (PPIA) is basically an installment agreement where you make payments until the Collection Statute Expiration Date (CSED). This is a 10-year time limit the IRS has to collect unpaid taxes. So any tax debts that remain once this deadline passes are effectively “wiped clean” and don’t have to be paid by you or your estate.

The problem with a PPIA is that it may take several years before the CSED passes. If you were to die before then, the PPIA balance that remains might be included in your estate, and the IRS may try to collect it.

Tax Resolution Option	Can the IRS File a Claim Against the Decedent’s Estate?	Additional Notes
Offer in Compromise	Yes (if the remaining balance has yet to be fully paid)	If the offer has been paid or there’s no estate, the IRS will not try to claim anything against the estate.
Currently Not Collectible (CNC) Status	Yes (if the CSED hasn’t run out)	The estate may be liable for the unpaid tax debt.
Installment Agreement	Yes (if payments still remain)	Even if the IRS accepts an installment agreement, it may still file a Notice of Federal Tax Lien, which will attach to the assets in your estate.
Partial Payment Installment Agreement	Yes (if the CSED hasn’t run out)	If there is still a balance due after death, the IRS may go after that if the estate goes through probate.
Do Nothing	Yes (assuming the CSED hasn’t run out)	Interest and penalties may continue to accrue; no protection against IRS collection actions.

How a Tax Attorney Can Help

If you’re looking to get your affairs in order, figuring out your tax situation is an important part of this process. The good news is that there may be multiple options to consider and ways for you to maximize the amount of property you can leave behind.

The bad news is that the law concerning these options can be nuanced and very fact-specific. And there could be other financial issues to deal with, such as figuring out how to deal with estate taxes.

As a result, the special skills and knowledge of a tax attorney with both tax resolution and estate planning experience are often needed. John Georvasilis from Seattle Legal Services, PLLC, is ready to help you during this difficult time. You can reach him through our online contact form or by calling 425-428-5262.

Dying and Owe the IRS FAQs

What happens to income earned by the decedent after they die?

If income is earned by the estate, it must be reported on the estate’s tax return. For example, if stocks appreciated while the estate was still in probate, those gains would need to be reported on an estate tax return.

Can the IRS take my personal assets, such as my house or bank account, if I die with tax debt?

Possibly. If that property is part of your estate, the IRS will be paid during the probate process (unless the money runs out, paying higher priority creditors first). However, if you die with non-probate property, meaning property that’s not subject to the probate process, it’s possible for that property to be passed to your heirs without the IRS being able to touch it.

A common example of non-probate property is life insurance proceeds. As long as there’s a named beneficiary (and no extenuating circumstances apply), those proceeds bypass the probate process and go directly to the beneficiary. The laws for other assets often vary from state to state.

Will my heirs or other family members have to pay for my tax debts?

Not usually, unless there are special circumstances or complications with your estate. One such situation can occur if your spouse dies and the tax debt stems from a joint tax return you filed with them while they were still alive. In this scenario, even though your spouse has died, you’re still responsible for the tax debt, unless you can qualify for separation of liability relief.

Will the IRS forgive the tax debt of someone who is about to die?

There are ways to get the IRS to settle tax debts for less than owed. Typically, you need to prove that you have limited income and assets, but if you have a terminal illness, the IRS may be willing to settle under the rules of effective tax administration. That’s a type of offer in compromise that can apply if there are exceptional circumstances that make collection of the full tax balance unfair and inequitable.

If the decedent has no estate when they die, what happens to the tax debt?

Absent unusual circumstances, if there’s no property available to pay off the decedent’s tax debts, those tax debts don’t get paid.

Can I transfer money or other assets to prevent the IRS from getting it after I die?

Possibly, but you have to be very careful to make sure it doesn’t constitute a fraudulent conveyance because it’s an attempt to avoid paying taxes you rightfully owe. Depending on what happened, both you and the person you transferred the property to could be liable for the fraudulent transfer, which could include tax evasion charges.

Another thing to remember is that if you have unresolved tax debts when you die and your executor or estate administrator knows about those debts, they can’t ignore them. If they do, whether by not paying the IRS or making the estate insolvent such that the IRS has nothing to collect from the estate, your executor or administrator could become personally liable for the unpaid tax bill.

Can a tax lawyer help me with unresolved tax issues before I pass?

Absolutely. They can help not only resolve the unpaid tax issues, but also help with creating an estate plan to provide a more streamlined probate process and limit any taxes or other financial obligations at the time of death.