IRS Tax Lien on Inherited Property

irs tax lien on inherited property

When a taxpayer neglects or fails to pay a tax debt, the government has a legal claim over the person’s property. The lien safeguards the government’s interest in all property owned by the taxpayer, including personal property, real land, and financial assets. So, what happens if a taxpayer with a power of appointment dies with unpaid federal income taxes? 

When the Internal Revenue Code (IRS) enters the taxpayer’s balance due on the books and issues a bill explaining how much is owed, a federal tax lien exists. The lien “relates back” to the date of assessment and remains in effect until the assessment is paid in full or becomes unenforceable due to the lapse of time. FYI, there’s a difference between an IRS tax levy and a tax lien.

The term “lapse of time” refers to a period of ten years in which the IRS has not attempted to collect the tax through a suit or distraint. As such, the lien remains in place even after the taxpayer dies. Meanwhile, the IRC 6324 allows a federal estate tax lien to reach assets subject to a decedent’s general power of appointment. This lien is a separate federal tax lien from the IRC 6321 lien.

The lien under IRC 6324 takes effect the day someone passes away. The lien attaches to any assets of the decedent’s gross estate that are required by federal law to be declared on Form 706, United States Estate Tax Return unless the estate tax is paid in full sooner.

Do IRS liens Expire After 10 years?

The Internal Revenue Service (IRS) has ten years to collect outstanding tax obligation in most cases. After that, the IRS clears the obligation from its books and writes it off; this is called the 10 Year Statute of Limitations. The IRS has no financial incentive to make this statute widely understood.

As a result, many taxpayers who owe money to the IRS are unaware of the statute of limitations. Furthermore, the subtleties of the Act, like other IRS rules, can be complex and difficult to comprehend.

The agency will likely become even more active in its collection actions as the Collection Statute Expiration Date (CSED) approaches. The IRS agents might play both  “good cop” and “bad cop” roles. Offering “deals” is one possibility.

Additionally, under Section 6503 of the Internal Revenue Code, the period of the collection can be suspended due to particular circumstances, including:

  • The taxpayer’s assets being seized by a court;
  • The issuance of a notice of deficiency;
  • The taxpayer lives outside of the US for six months or longer;
  • The wrongful placement of a lien on the taxpayer’s property;
  • The wrongful seizure of the taxpayer’s assets and properties; and,
  • The taxpayer filing for bankruptcy.

The clock will restart after these circumstances, but not always immediately. For instance, after the bankruptcy case is settled, it will take another 6 months. The CSED is, of course, delayed and hence extended while the clock is not running. The IRS may not tell taxpayers when the statute of limitations has expired. Taxpayers or their tax relief specialists must keep track of this. It is also their job to receive evidence from the IRS proving that the tax debt has been resolved.

Once that is established, a tax relief professional can help the individual get an official Certificate of Release of Federal Tax Lien or a Lien Withdrawal from the IRS. Proof of a lien release or withdrawal is frequently required to prove creditworthiness to financial institutions. It is a first step toward repairing taxpayers’ financial profiles. 

However, the “waiting it out” technique is not appropriate for all tax debtors. A ten-year span is quite long. Some businesses, for example, maybe unable to continue operating due to the IRS’s standard collection measures. Using an impending CSED as an IRS tax debt tactic should only be considered with the help of a professional. Despite all this, there are ways to get an IRS lien discharge.

Do Tax Liens Go Away After Death?

Don’t expect your federal tax obligation to go with you if you owe money to the IRS and pass away before paying it off. Even if your will specifies that your remaining assets be distributed elsewhere, the IRS is still legally entitled to the money you owe and will go to tremendous measures to collect it.

The IRS sends you a notification explaining how much you owe and demands payment when you owe a tax debt. If you pass away before paying your outstanding taxes, the IRS will send a collection notice to the person in charge of your estate, who is usually referred to as an executor or administrator depending on state law. The executor or administrator of your estate is in charge of administering your estate and distributing whatever assets you have left behind.

Tax debts from the federal government take precedence over other debts. Without first paying your delinquent tax liability, the executor can not transfer cash and assets to your heirs, pay other creditors, or even pay for your hospital expenditures or burial. 

Any returns you would have had to file for the year of your death must also be filed by the executor. If you have unpaid taxes, the IRS will place an “estate lien” on your property when you die. An IRS tax lien on a deceased person binds to all property you own, unlike other liens that only attach to a specific asset. 

Liens on property prevent you from selling or transferring it until you pay the debt that triggered the lien. If the executor needs to sell your house to pay off the tax bill, he can petition the IRS to have the lien lifted so he can do so. The IRS will charge a penalty fee equal to the value of the transferred asset if the executor sells or transfers the property without paying off the lien.

Furthermore, if you and your spouse lived in a community property state and filed joint tax returns, the IRS may hold your spouse responsible for unpaid taxes after you pass away. With that said, spouses may be eligible for “innocent spouse relief” in certain circumstances. 

For instance, if you claimed erroneous credits and deductions without telling your spouse, he or she may be eligible for innocent spouse relief. If your spouse’s request for innocent spouse relief is granted, the IRS will have to concentrate its efforts on collecting from your estate rather than your loved ones.

The tax you pay upon death is different from the estate tax, which is what your estate may owe if you have a large fortune when you pass away. The taxes you owe upon death are separate from federal estate tax and can be lower or higher depending on where you live.

IRS Tax Lien Lookup

A lien is a legal claim on your property that serves as collateral for a tax or fee debt. The recording of a lien informs your creditors that they have a claim on your property. It is released if the debt is paid in full and does not affect your ability to access your property.

Furthermore, the IRS requests that federal tax liens should be documented in addition to being filed with the US Federal Income and Balance Sheets. Thus, you may contact them immediately if you have questions regarding a federal tax lien:

  • General Information (800) 829-1040
  • Centralized Lien Operation (800) 913-6050

Aside from these contact numbers, you may also refer to Publication 14​50 or visit the Internal Revenue Service official website for more information. On top of that, State tax liens are also registered at the request of various government bodies. If you have any queries concerning a state tax lien, you should contact the appropriate office directly.

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