Can the IRS Make You Pay For a Relative's Debt?
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With some limited exceptions, it’s generally an established legal fact that you cannot be made to pay your relatives’ debts. Unless you are a spouse or a co-signer on a loan, your familial obligations usually need not be financial for the purposes of debt collection.

Unfortunately for Madeleine Pickens, the widow of aviation mogul Allen Paulson, the IRS finds that restriction to be very inconvenient. So when Paulson’s son from a previous marriage allegedly frittered away the assets of a trust through mismanagement, the IRS came knocking on Pickens’s door.

Paulson had transferred most of his assets into a living trust over the course of his lifetime. Upon his death in 2000, his son was designated trustee, choosing to enter into a fifteen-year payment plan to pay the trust’s estate taxes. Pickens received some property from the trust in 2003, but otherwise had no involvement with the trust.

By 2010, the trust had defaulted and the IRS had terminated the payment plan. Even though the trust’s assets were estimated to be sufficient to pay the roughly $10 million outstanding tax bill at the time, the trust’s assets continued to be whittled away until it was declared to be depleted in 2013 with the $10 million tax bill outstanding.

Two years later, and twelve years after her last interaction with the trust, the IRS tried to make up the difference by holding Pickens personally liable for the entire $10 million tax bill, as the trustees were out of cash for the IRS to seize. Never mind that by that point the IRS had had nearly fifteen years to protect its interest in the trustees’ tax debt with all the tools at its disposal, or that the tax bill exceeded what Pickens had received from the trust in the first place — the IRS still simply chose to target the next closest relative.

It’s worth noting how much of this debacle was of the IRS’s own making. It failed to monitor the payment plan that the trust was placed under, ignoring the fact that the trust was not paying the taxes it was liable to pay under the payment plan. That’s a mistake that the IRS should not be allowed to rectify by reaching into the nearest pair of deep pockets.

Now, talk of multi-million-dollar trusts and estate tax payments might seem to be of minimal relevance to most of us, but the IRS tends to apply its most aggressive tax enforcement tactics against rich and poor alike. If the IRS is saying that it thinks taxpayers should be held liable for their relatives’ tax debt, taxpayers of all income levels should believe it.

Such a precedent would not only be deeply unfair to Pickens, it would also reward the IRS for its failures to enforce the rules with the trust that actually owed the taxes in the first place. A private lender that failed to monitor payment plans or take the necessary steps to protect its interest in what a taxpayer owed would be out of luck. Should the IRS get its way in this case, it would only reinforce the idea that innocent relatives are a suitable replacement should the IRS let a delinquent taxpayer run out of money to tax.

Taxes are complicated enough without needing to monitor your relatives’ tax compliance as well as your own to prevent the IRS from knocking. Taxpayers deserve to know for certain that their liability ends with their own tax obligations.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. 

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