Benjamin Franklin is credited with the famous line "In this world, nothing can be said to be certain, except death and taxes." It's true that people tend to fear both the end of their existence and the possibility of getting a big bill from the IRS. But what happens if both of those things happen at the same time? What happens when you owe the IRS, and you die? Does the debt die too? In most cases, the answer is no.
Filing an Income Tax Return
Everyone is required to file an income tax return annually if they are under 65 years of age and they meet the minimum threshold of applicable income. This amount is reviewed every year, and for 2017 returns it was set at $10,400. Once you are over 65, the income threshold amount changes to accommodate earnings from Social Security and those who are married may also have to file if their spouse has earnings or if they are claiming dependents.
The easiest way to find out if you need to file an income tax return is to visit the IRS website which has an online interactive tax assistant tool that allows you to input all your data and find out if you have to file tax information for this year.
Many people file their taxes themselves. Nowadays you can put the pencil and calculator away as there are many apps and computer programs designed to make it effortless for you to answer a series of questions and file your return electronically. These apps and programs make getting your return filed on time and your refund in your hand even easier than ever before.
However, if you are confused by the process or need a hand, you can hire a tax professional to guide you through the process and help you complete the correct documents to file your tax return.
But how do you know if you owe money back to the government and what happens when you owe the IRS?
How Do You Know if You Owe Taxes?
If you complete your tax return correctly, you should have a good idea if you are expecting a refund this year or if you owe the government money in unpaid taxes. However, if you have made an error on the return, your taxes are very complicated, your tax professional made a mistake, or you owe from previous years you may well have an outstanding balance that you will need to clear.
To find out if you owe money to the government, you can call the IRS toll free at 800-829-1040, and they will be able to access your tax records and let you know if you have a deficit.
If you are told that you have a balance you need to clear, you'll want to answer the question of what happens when you owe the IRS money.
What Happens if You Do Owe Back Taxes
If you find out you do owe money to the government, it can be overwhelming and, sometimes, a scary experience. Many people panic when faced with a large tax bill and bury their head in the sand trying to ignore the problem. Refusing to deal with outstanding taxes is the wrong approach and can lead to your debt spiraling out of control as fees, charges, penalties and interest are added on to the outstanding amount owed.
If you do not attempt to contact the IRS to discuss the amount you owe and make a plan for paying it back, they may even put a lien on your assets and could garnish your wages until the debt is paid back. If this happens, it will significantly impact your credit rating. A decline in your credit score of even 100 points can make it difficult for you to access credit or get approved for a car loan or a mortgage. It's easy to see how ignoring your tax responsibilities can lead to a real decline in your happiness and quality of life.
You will need to make a plan to pay your outstanding taxes as soon as possible. You cannot ignore a debt to the government, and it will not go away all by itself. The IRS works with people to help them make manageable payments within their financial constraints. People who owe money to the IRS often worry they will demand the entire amount all at once which they cannot pay. But the IRS can help you organize regular payments that you can manage within your budget. They would rather have some of their money back than none at all.
What Happens to Tax Debt When You Die
If you are faced with a big tax bill and feel like you will be paying it off for the rest of your life, you might wonder what will happen if there is still an outstanding balance after you pass. What happens to tax debt when you die and does IRS debt after death affect your family or the things you leave behind?
When you die, an executor will need to be named to handle all the paperwork associated with your estate and to manage outstanding debts that you leave behind. Executors can be family members, friends, tax professionals or lawyers. You can name your executor in your will, and although most family members or friends will take this role on for free, professionals will charge anywhere from 1-to-5 percent of the estate, according to Jim Miller in an article for the HuffPost.
Executors are responsible for making sure your final wishes are carried out, your will is read and addressing your final responsibilities including paperwork and debts.
If you are getting older or facing a diagnosis of terminal illness, you may well have time to put some of these processes in place before you pass. You can choose your executor and try to address your debts before you pass away.
But If you die suddenly and while you are still earning regular working income it might not be as straightforward. Even though you would have died, an income tax return still needs to be filed for the current fiscal year. Your executor will need to file your final form 1040. If you have a surviving spouse they will need to sign the form on your behalf otherwise the executor will need to provide proof of a court-appointed personal representative who has been authorized to deal with your financial affairs after death.
Unfortunately, if you owe tax debt after your death, it doesn't just disappear with you, as much as you might wish that it would. The executor will have to make sure that all outstanding debts are paid off, and this may include selling off your assets if you do not have enough money in your bank accounts to cover the debts. None of your assets can be given away to your family or friends in accordance with your final wishes until your debts are paid off.
If your estate does not have enough liquid assets to pay off your final tax bills, the IRS will put a lien against your assets, including any real estate, vehicles, cars, land or other valuables that you owned. Even if your will leaves these items to specific people, they cannot inherit them until the IRS has been paid back in full.
If you own a business, it may be a little more complicated for your executor, especially if you owe both business and personal taxes or if you have a business partner or customers or suppliers who are also chasing back payments. Your executor could benefit from hiring a probate lawyer as an expert to advise on the law and the responsibilities your family may have to pay back all creditors.
Will Your Family Have to Pay Off Your Tax Debt?
If your IRS debt after death bill is large it could potentially wipe out all your assets and your family may not be left with any inherited property or valuables from you at all. However, if all your assets still do not equal the total of your outstanding debts the IRS will have to be satisfied with a partial payment. The same applies to any other debts you may have left behind after your die including credit cards, car loans or other debts.
According to The Federal Trade Commission (FTC) family members who are not your spouse will usually never be held accountable for your outstanding tax bill once your assets have been liquidated. So you do not have to worry about your parents, children or other family members being left on the hook for your tax debts.
However, your spouse may be responsible for debts if the assets are in both your names or if credit was given to you both. If you and your spouse file joint tax returns they can be held responsible for your back taxes. When a loved one passes away, it is a time of stress and sadness. A lot of practical matters need to be attended to, including the organization of a funeral, selling real estate and comforting family members. Dealing with a large unpaid tax bill at this time would be very stressful and could leave your spouse short of money for your final arrangements or even daily life.
An option available to a husband or wife of a deceased person with an unpaid tax bill is to file an "Innocent Spouse Relief" form. The IRS website explains how this works:
"Innocent Spouse Relief provides you relief from the additional tax you owe if your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits."
Surviving spouses will need to provide proof that their deceased spouse acted without their knowledge and that they were not complicit in any attempt to defraud the government or purposefully underpay income taxes. They will also have to act fairly quickly during what will no doubt be a very difficult time as there is a two-year time limit on claiming innocent spouse relief from the time the payment of the back taxes were requested. If you had been avoiding the IRS and denying that you had a large debt to address then some time may have already passed since the repayment of this money was requested. Your spouse should seek the advice of a tax professional on applying for this exemption and paying off any outstanding debts that must be paid.
Taxes are one thing that you cannot escape, even in death, so do your family a favor and don't hand them your IRS debt after death. Make sure your financial obligations are in order so you can still leave them something after you pass away rather than giving it all over to the government in payment for your tax debt.
Fiona Tapp is a freelance writer and educator. Her work has been featured on The Washington Post, HuffPost, The Toronto Star, Brit+Co, and others. She writes about a variety of topics including Homes, Parenting, Education, and Travel. Fiona is a former teacher and masters degree holder.