How to Settle an Estate for Someone That Owes Back Taxes to the IRS

by John Cromwell

If you are chosen to be the executor or representative for a person’s estate, one of the tasks you will be asked to accomplish is settling the decedent’s outstanding debts. Any outstanding liability the decedent has due to his federal tax obligations must be settled. It is important to note that the process used to settle estates varies by state. If you are responsible for settling an estate, consider consulting with a local professional to ensure you comply with the law of your state.

Probate Process

Initiate the probate process. During probate, a court will oversee the settlement of an estate. The process begins with a court reviewing the decedent’s will, if one is available, to ensure it complies with the state’s drafting requirements. If the court determines the will is valid, the court will certify it and appoint the named executor to oversee the estate. If there is no will, the court will appoint one of the decedent’s relatives or friends to oversee the estate. If there is no one named as an executor, you normally can apply to the court to oversee the estate.

Final Tax Return

Complete the decedent’s final tax return. Include all relevant income and expenses on the return generated during the last tax year. Add the word “deceased” after the decedent’s name in the name and address section. Write the date of the decedent’s death along the top of the return. Sign the return and include the term "executor" or “personal representative,” to signify your relationship to the decedent.

IRS Information

Federal tax debt is subject to penalties and interest while unpaid. As a result, you will need to determine the current balance of the debt. Obtain a blank copy of Form 4506-T, Request for Transcript of a Tax Return, from the IRS website. Complete the form using the personal information of the decedent. Sign the document where it says "signature" and identify yourself as the executor or personal representative. Review the form’s directions to determine where to submit the document; mail it within 120 days of the date next to your signature.

Estate Inventory

Take inventory of the decedent’s probate assets. This step is used to evaluate what will be included in the estate and the estate’s overall value. All of the property should be recorded with sufficient detail, describing what each asset is and its fair market value as of the day the decedent died. If there are debts attached to any of the assets, those amounts should be recorded in conjunction with the assets. Property that should be included in the inventory includes real estate held in the decedent’s name only, personal bank accounts, household goods and vehicles.

Settle Debts

Calculate how much the decedent owed as of his death and add any expenses related to the administration of the estate and the decedent’s funeral expenses. If the total debts exceed the value of the assets in the estate, you will generally need to pay all of the estate administration costs first, next all funeral expenses and then all federal back taxes. If any assets remain, use them to pay off all remaining debts. Tax payments may be submitted to the IRS through its website. If you have any questions regarding tax payments, you can call the IRS at 800-829-1040.

Complete Probate Process

If there are any remaining assets after settling all debts, you should distribute them according to the terms of the will or subject to the state’s intestate rules. Generally, under intestate, the decedent’s property is divided among his living relatives. After this has been done, you generally must appear before the supervising probate court. It will review your work and then close the estate.