What’s the only thing more uncomfortable than thinking about tax debt? Thinking about your own death – and then, what happens to your tax debt when you die. Planning the logistics of your departure from this world may not be the most comfortable activity. However, a little time and energy on your part can save those you leave behind from an arduous task. You want to be certain that your money, property, and assets are divided and distributed according to your wishes. As you navigate this essential realm of tax debt after death, it’s critical to determine how your taxes – and any existing problems – can upset your postmortem financial blueprint.
The Life of a Tax Debt
Any delinquent federal tax balance has a lifespan of ten years. This liability clock begins on the date of assessment and ends ten years later. For example, the IRS will not excuse a tax debt assessed on June 1, 2017, until June 1, 2027. There are factors that can extend this time frame, but if you did nothing to resolve your debt, you can expect that it will be collectible for a full decade.
During Your Debt’s Life Cycle
Any unresolved IRS balance is subject to collection activity. This means that you are vulnerable to efforts such as a levy against your bank accounts, a wage garnishment or even a property seizure. The longer you wait to make resolution efforts, the more likely you are to experience aggressive collection measures.
Tax Debt When You Die
Unfortunately, even your death does not necessarily excuse your tax debt. If your delinquent balance has five years left before it reaches expiration, then the IRS may continue collection activity for this time. And while you obviously won’t be liable for payment, your family may be.
In the event that you filed a joint tax return with your spouse and that ultimately yielded a tax debt, both you and your spouse are initially responsible for the balance. Should you pass away before this sum is paid, your spouse will still be subject to IRS collection efforts. Your partner can make an innocent spouse request if he or she had no knowledge of (and no reason to know about) filing errors which led to the tax debt; if approved, the IRS will not pursue collection activity against your surviving spouse.
Your family and friends won’t be vulnerable to IRS collections for your tax debt when you die. But the money and/or property you intend to leave them can be. Following your demise, any outstanding tax liability must be paid before your assets are allocated to your heirs. Failing to plan properly can make a mess of your affairs; one that those you leave behind will be forced to clean up before receiving what’s left of your estate.
How to Be Ready
You can never be completely prepared to shed this mortal coil. However, with some careful planning, you can be reasonably sure that a tax debt won’t complicate matters for your spouse and family. You may wish to consult with a fiduciary when arranging your affairs. And, if a tax debt exists, consider speaking with a licensed tax professional. As long as a resolution is in place for any IRS issue, you can rest easier knowing that you’re working towards outliving your tax debt – a proposition that both you and your family can appreciate.