IRS: The ‘Side Chick’ Who Doesn’t Let Go, Even After You’re Gone

The IRS will chase you down in heaven or hell.  

That line sounds like a bad joke, but some of my family has learned this the hard way. When my grandmother passed away, my aunt stepped up as executor. She arduously prepared the estate: dividing keepsakes, working through paperwork, comforting family. What she wasn’t ready for? The IRS letter that landed in her mailbox after the estate attorney applied for a Tax Identification Number (TIN) for the estate.

Her reaction: pure panic. Why is the IRS telling me I have to do something for them on behalf of someone who isn’t even alive anymore?

The truth is, Uncle Sam doesn’t pack up his bags when you do. There are very real post-death tax consequences, and they can catch heirs and executors off guard.

The Taxes That Do Not Get Buried With You:

1. Final Income Tax Return
   The year you pass away, your estate is still responsible for filing your final income tax return. Wages, pensions, Social Security, investment income, it all gets reported as if you are still alive. Even if your life ended in March, the IRS wants to know what you made from January 1 until your final day in March.  Dividends, interest, pension income, all of those tax documents are vital to your executor to report for your final tax return for that time period. 

2. Estate Taxes
   For larger estates, federal estate taxes may apply (in 2025, the federal exemption is over $13 million per person—but some STATES have much lower thresholds). Washington, for example, starts taxing estates just over $2.2 million. That’s not exactly “only for the ultra-rich.” Some states do not have any estate taxes.  For some people, depending on their preparation, the value of the home is considered part of the estate as the person owned it when they passed.  The value of the home is considered for part of the estate. 

3. Estate Income Taxes
   If the estate earns money while it’s being settled—say, dividends, rental income, or capital gains on an investment sale—the executor has to file a separate estate income tax return. Yes, your estate can become its own taxpayer. That’s what triggered the IRS letter to my aunt.

4. Capital Gains for Heirs
   Here’s where it gets tricky—but it’s also one of the biggest tax breaks you’ll ever get. Normally, when you sell something like a house, stock, or land, you pay capital gains tax on the profit: the difference between what it cost when you bought it and what you sell it for. That original number is called your basis.

When someone dies, the IRS gives heirs a clean slate. Instead of sticking you with Grandma’s 1970s purchase price, the IRS “steps up” the basis to the asset’s current market value on the day she died.

Example: Grandma bought her house in 1970 for $50,000. Today it’s worth $500,000. Without the step-up, you’d owe capital gains on $450,000 if you sold it. With the step-up, your new basis is $500,000. Sell it for $500,000 right away? You owe zero in capital gains.

Why Estate Taxes Matter

Death is stressful enough without IRS letters adding to the panic and grief. Executors often have no idea that they’re stepping into the role of part-time tax preparer, estate manager, and negotiator with accountants and attorneys.

If you don’t plan ahead, your heirs may face delays, extra taxes, penalties and unnecessary stress. If you do plan ahead—by organizing accounts, updating estate documents, and setting expectations—you give your loved ones a gift far more valuable than money: a carefully considered plan and peace of mind. You were thinking of them before you left.  

Do You Need To Do Something?

You may leave behind heirlooms, houses, or hard cash, but you also leave behind obligations. Taxes don’t end when you die, and pretending they do only sets your family up for a shock.

So while you’re alive, take the time to ask:

• Would my heirs benefit from some trust planning or reorganizing of my estate?

• Do I know what taxes will apply to my estate?

• Who will handle my final return?

• Have I explained this to my executor or heirs?

Because the IRS doesn’t care how awkward these conversations are, the IRS only cares about getting paid.

Would you not rather your heirs inherit memories and legacy than a stack of tax notices?