If you’re the beneficiary of an inheritance, you may wonder if the IRS will be notified. The answer is maybe. It depends on the size of the inheritance and how it was paid out.
In general, the IRS does not require estates to report small inheritances. However, if the inheritance is substantial, the estate may be required to file a federal estate tax return (Form 706). This is true even if no estate tax is owed.
If the inheritance is paid out through probate, the court will usually send a notice to the IRS. However, if the inheritance is paid out directly to the beneficiary, there is no requirement to notify the IRS.
It’s important to note that even though the IRS may not be notified of a small inheritance, you must still report it on your income tax return. This is true for both federal and state taxes.
Table of Contents
What the IRS Knows
The IRS Has Your Contact Information
The IRS has your contact information when you inherit money. They will use this information to contact you about any taxes that may be owed on the inheritance.
The IRS May Have a Record of the Deceased Person’s Income
The IRS will likely have a record of the deceased person’s income. This includes money from a job, Social Security, pensions, and other sources. The IRS may also have a record of any money the deceased person owed, such as back taxes.
If you’re the executor of the deceased person’s estate, you may need to file a federal estate tax return. This is a tax on the value of the deceased person’s property. You may also need to file state estate or inheritance taxes.
The IRS has information about filing these and other tax returns after someone dies. You can find this information on the IRS website or by calling 1-800-829-1040.
The IRS May Know About the Inheritance Through Probate
The Internal Revenue Service (IRS) may become aware of an inheritance through probate. Probate is the legal process of settling an estate after a person dies. If the deceased person’s assets are subject to probate, it’s likely because they weren’t properly titled in joint ownership or designated as payable on death to a beneficiary.
When a person dies and their assets are subject to probate, the estate executor files a “Petition for Probate” with the court. The petition lists the deceased person’s assets and estimated value. It also names the beneficiaries of the estate. The court uses this information to determine whether an inheritance tax is owed on any assets.
If an inheritance tax is owed, the IRS will notify the estate executor and send a bill for payment. Once the taxes are paid, the IRS will issue a “Closing Letter” stating that the estate has been closed and that no further action is required.
The IRS can also become aware of inheritance through estate tax returns. If an estate is valued at over $5,430,000 (as of 2016), it must file an estate tax return with the IRS, even if no taxes are owed. The return must be filed within nine months of the date of death and list all inherited assets and their value.
If you inherit property from someone who died after 2015, you may have to pay capital gains tax on any profits you earn from selling it. However, a special “step-up in basis” rule applies to inherited property. This rule allows you to reset the cost basis of inherited property to its fair market value at the date of death (or alternate valuation date). Eventually, selling the property can result in a lower capital gains tax bill.
How the IRS Finds Out About Inherited Money
The IRS typically finds out about inherited money when the estate files a tax return. If the estate does not file a return, the IRS may find out through an audit. The IRS may also find out if the heir does not report the inherited money on their tax return.
The IRS May Request Documentation
The IRS is aware that sometimes people receive money or other assets through an inheritance. While you may not owe taxes on the inheritance itself, you may owe taxes on any income you earn from inherited investments or property.
The process for reporting inheritance income to the IRS will depend on how the money or assets were transferred to you. If the money was transferred through a trust or estate, the trustee or executor should provide you with documentation that you can use to file your taxes. If the money was transferred directly to you, you might need to provide documentation to the IRS to prove that you inherited the money.
The best way to avoid any problems with the IRS is to keep good records of all inheritance income and expenditures. This will help you show that you are only paying taxes on inherited money that you have received.
The IRS May Conduct an Audit
If the decedent wasn’t required to file a federal return, then usually, no estate tax return must be filed. In this case, the only time the IRS would get involved is if it conducted an estate audit and found that an estate tax return should have been filed.
Inherited money is considered taxable income by the IRS. However, there are certain circumstances in which inherited money may not be taxed. For example, if you inherit a retirement account, you may not have to pay taxes on the account if you withdraw the money according to the rules of the account.
What to Do If You Inherit Money
If you inherit money, the IRS will most likely be notified. The IRS will not necessarily tax the money you inherit, but they will want to know about it. There are a few things you should do if you inherit money. First, you should keep good records. This means keeping track of how much money you inherit, when you inherit it and what you do with it.
Notify the IRS
The Internal Revenue Service (IRS) may need to be notified if you inherit money. The agency might be owed taxes on the estate, or you might have to pay taxes on the money you inherit.
When someone dies, their estate—which can include money, property, and other assets—is generally subject to federal estate taxes. If the estate is valued at more than $11.4 million as of 2019, the executor of the estate will likely have to file a return with the IRS and pay estate taxes.
You might also have to pay taxes on the money you inherit, depending on the type of asset and your relationship with the deceased person. For example, if you inherit stock from a parent, you generally won’t owe any taxes on it as long as you don’t sell it right away. But if you inherit a 401(k) or another retirement account from a parent, you will likely have to pay income taxes on any withdrawals you make.
If you have questions about whether or not you owe taxes on an inheritance, you should contact a tax professional or the IRS directly.
Pay Taxes on the Inheritance
If you’re the beneficiary of an inheritance, you may have to pay taxes on the money you receive. The amount of tax you’ll owe depends on a few factors, such as the amount of money you inherit and your relationship with the deceased.
The federal government does not levy inheritance taxes. However, some states charge taxes on inheritances, so you’ll need to check with your state’s tax agency to see if you owe any taxes.
If you’re the deceased’s spouse, you may be exempt from paying inheritance taxes in some states. And, if the inheritance is from a qualified retirement plan, such as a 401(k) or IRA, you may not have to pay any taxes.
In most cases, you’ll have to pay taxes on inherited property if it’s not exempt. The property’s value is first determined to calculate the inheritance tax owed. An appraiser usually does this. Once the value is determined, taxes are calculated based on that value and your relationship to the deceased.
For example, if you’re inheriting $50,000 from a parent who died in 2020, and your state has an inheritance tax rate of 10%, you would owe $5,000 in inheritance taxes. If your state doesn’t have an inheritance tax, you wouldn’t owe any taxes on the inherited money.
Conclusion
After all, is said and done, it is important to remember that the IRS still needs to be notified of any large financial changes in your life—inheriting money or property is no exception. By law, you must file a gift tax return if the total value of all gifts received in a single year exceeds $15,000. While you may not owe any taxes on the inheritance, failure to file this return can result in penalties and interest being charged on the unpaid tax.
