Transferee Liability: When the IRS Comes After Heirs

The usual rule is comforting: children do not inherit their parents' debts. That is true. But when an estate pays out to heirs while a tax debt goes unpaid, the IRS does not just write the debt off. It follows the money.

The procedural tool is IRC 6901. The substantive basis is either federal law, such as the estate tax provisions, or state law, such as Florida's fraudulent transfer statute. Together they let the IRS assess and collect a decedent's taxes from the people who received the decedent's property.

What 6901 actually does

IRC 6901 is mostly a procedure statute. It does not, by itself, make anyone liable. It says that the liability, at law or in equity, of a transferee of property of a taxpayer, decedent or donor shall be assessed, paid and collected in the same manner as the underlying tax.

That matters because it lets the IRS skip a lawsuit. Instead of suing an heir in federal district court, the IRS can issue a notice of transferee liability, give the heir the right to go to Tax Court, and then assess and collect administratively, with liens and levies, just as it would against the original taxpayer.

IRC 6901(h) defines transferee broadly. It includes a donee, heir, legatee, devisee, and distributee. For estate tax, it also includes anyone personally liable under IRC 6324(a)(2).

The same statute, at 6901(a)(1)(B), covers the liability of a fiduciary under 31 U.S.C. 3713(b). So the executor who paid the wrong creditor first, discussed in the guide to executor personal liability, can be assessed the same way.

The two sources of liability

Federal law: the estate tax. For unpaid estate tax, IRC 6324(a)(2) makes a spouse, transferee, trustee, surviving tenant, or beneficiary who received property included in the gross estate under sections 2034 through 2042 personally liable, up to the date-of-death value of that property. The IRS does not need to prove fraud or insolvency. Receipt of the property is enough. The guide to the special estate tax lien covers this in more detail. A parallel rule in IRC 6324(b) makes donees liable for unpaid gift tax.

State law: everything else. For a decedent's unpaid income tax, there is no federal provision that automatically makes heirs liable. The IRS looks to state law. In Florida, that is primarily the Uniform Fraudulent Transfer Act in Florida Statutes chapter 726.

Under that act, a transfer can be avoided as to a creditor if it was made without receiving reasonably equivalent value while the transferor was insolvent or became insolvent as a result. Distributions from an estate to heirs are, by nature, made for no value. If the estate could not pay its debts after distributing, the distribution is vulnerable. The IRS is a creditor like any other for this purpose.

IRM 5.17.14 and IRM 8.7.5 describe how IRS collection and Appeals personnel evaluate these cases, including the state-law analysis.

How the IRS proceeds

Transferee cases often start with a revenue officer who cannot collect from the estate because the estate has been emptied. The officer traces where the assets went, using probate records, bank records and property deeds. Then the case is developed for transferee assessment.

The heir receives a notice of transferee liability, which works like a notice of deficiency. Under IRC 6901(f), once it is mailed, the IRS cannot assess while the heir has the right to petition the Tax Court, and if a petition is filed, until the Tax Court decision becomes final.

That is the moment to act. Missing the Tax Court deadline means the liability is assessed without any judge looking at it.

Deadlines the IRS has to meet

IRC 6901(c) sets the limitations periods:

• Initial transferee: within one year after the period for assessment against the transferor expires.
• Transferee of a transferee: within one year after the period against the preceding transferee expires, but not more than three years after the period against the initial transferor expires.
• Fiduciary: within one year after the liability arises or by the end of the period for collection of the tax, whichever is later.

IRC 6901(e) adds a point specific to estates: if the transferor is deceased, the period against the transferor is what it would have been if death had not occurred. So a decedent's unfiled year, with no assessment period under IRC 6501(c)(3), can leave heirs exposed for a long time.

That is one more reason executors should file the decedent's missing returns and request prompt assessment before distributing. A shorter period against the estate means a shorter period against the heirs.

Burden of proof

IRC 6902(a) provides that in Tax Court, the IRS has the burden to show that the petitioner is liable as a transferee, but not to show that the taxpayer was liable for the tax.

In practice, that splits the case. The IRS has to prove the transfer, the value, and the state-law or federal basis for liability. The heir has to bring evidence if they want to challenge the decedent's underlying tax. Heirs rarely have the decedent's records, which is why preserving them during administration matters.

Non-probate recipients

Transferee exposure is not limited to people named in the will. Joint account survivors, life insurance beneficiaries, and beneficiaries of a revocable trust can all be transferees. For estate tax, IRC 6324(a)(2) reaches them directly. For income tax, the question is whether state law treats the transfer as one a creditor can reach.

Florida families often use revocable trusts to avoid probate. A trust does not avoid the IRS. A successor trustee who distributes trust assets while the decedent's taxes are unpaid can face the same questions an executor would. See trustee liability for unpaid trust taxes.

Getting the decedent's records

Congress anticipated that transferees would not have the taxpayer's records. IRC 6902(b) lets a transferee who has petitioned the Tax Court apply for a preliminary examination of the books, papers, documents and other evidence of the taxpayer or a preceding transferee. The Tax Court can issue a subpoena for production of that evidence if it is needed to determine the taxpayer's liability and will not cause undue hardship. For an heir trying to challenge a parent's assessment, that is often the only way to see the records the case turns on.

Defenses that actually work

1. The value cap. Liability is limited to what you received. If you inherited $40,000, the IRS cannot collect $90,000 from you.
2. The estate was solvent. Under Florida's fraudulent transfer law, a distribution that left the estate able to pay its debts is generally not avoidable. Show the numbers.
3. The underlying tax is wrong. Many decedent assessments come from substitutes for return or automated notices. They can be overstated.
4. The statute ran. Check the IRC 6901(c) dates carefully, including any extensions the executor signed.
5. Value was given. A transfer for reasonably equivalent value, such as a bona fide sale, generally does not create state-law transferee liability.

Resolving it

Once transferee liability is assessed, it is collected like any tax. The heir can pursue the usual collection alternatives: installment agreements, an offer in compromise, or a showing that collection would cause hardship. The heir's own financial situation drives those options, not the estate's.

The best outcome, though, is avoiding the notice entirely. Executors who resolve taxes before distributing, and heirs who ask whether that has happened before accepting a large distribution, rarely see a transferee case. See what happens to IRS tax debt when someone dies for the full picture.

If you inherited property and the IRS now says you owe the decedent's taxes, call (813) 229-7100. Let's talk.