Can an inheritance expose you to IRS through co-mingled finances if one of your siblings has IRS problems?

Question

My wife's father passed away last year, leaving the home to his three adult children. My wife's younger brother lives in the house, and has lived there for some time. The younger brother worked as an independent contractor for a service company for the last 5 - 10 years, and was paid on a 1099. He hasn't filed income tax returns for a number of years. He doesn't make a lot of money, but he does make enough to owe Medicare and income taxes. The estate initially had a Medicaid claim against it, but the family received a hardship waiver due to the my brother-in-law's limited finances. I've heard that if you have co-mingled finances with someone and they owe the IRS, the IRS could come after our assets. The estate provided the 1099s to the Medicaid workers for evaluating the hardship, so the Medicaid division is aware no taxes were paid. Are they under any obligation to inform the state revenue office? My concern is the shared ownership of the house could expose my family if the IRS goes after the younger brother. Does inheriting the estate expose my wife to any IRS issues her brother might have?

Answer 1

Has the IRS already asessed something against your brother? The IRS won't share that information with you, but you could ask him.

If so, it is likely there is already a lien on him, and, if he lives in that house, it will list that house as his address. You can check on the county recorders office to be sure.

Otherwise, when the IRS goes after him, they will probably put a lien on him, using the house address. The lien is in his name, but some zealous county recorder office checkers will also use the address the lien is on, incorrectly IMO.

If the IRS decides to seize the property (very unlikely), they can only seize 1/3 of it, and probably force a sale.

OK, looking at the additional information:

It looks like your brother has been "flying under the radar" for the IRS. For about $20,000/yr, the worst-case scenario would be a touch over $3,000/yr taxes. But, as an independent contractor, he may be able to take certain deductions against the income, and it could be much less.

The IRS has the income information, but, for whatever reason, it hasn't produced any action.

The state has no obligation to inform the IRS of anything, and it actually might violate privacy laws if they did.

There is no guarantee that your brother will stay "under the radar." The longer he goes without filing, the more potential tax he is accruing, and at a certain point the IRS will take an interest. Then; demand for returns; if no returns 6020(b) returns (the number is the section in the IRS code), and then, if no response, lien (against your brother only) and levy (against your brother's assets only). They also could take his "toys' away through a seizure.

Answer 2

He owes whatever he owes.  The IRS can and probably will place a lien on the property.  That won't affect your wife's share of the equity in the home nor will it result in her becoming liable for his taxes.  She DOES need to make sure that title is properly passed from the estate to all current owners though, in order to actually protect her interests.  The only issue that I see is if her name is on the deed, any tax lien could be picked up by the credit bureaus against her name.  The lien will be in his name alone, however the credit bureaus often tar everyone whose name appears on the deed with the same brush.  She'll need to stay on top of that to get it cleared off of her credit record.

This isn't an issue of "commingled finances."  That would be if his money were sitting in her bank account for example.  This isn't the case here.

FYI, Medicaid would only know if taxes were unpaid if he told them.  Merely seeing the 1099s doesn't tell them if taxes were paid or not, and the IRS will not share that information with anyone without the taxpayer's explicit written consent.  However once the IRS files the tax lien on the real estate, it won't take an MBA to figure out what's probably going on.