What Can The IRS Do If My Mother-In-Law Hasn't Filed A Tax Return In Over 20 Years

[allanb]

California, I have posted other questions on this forum in regard to my mother-in-law, and here is another one. My Mother-In-Law has not filed any tax returns in the last, at least, 20 years, the only income that she had was Social Security and some Vanguard accounts that paid her monthly. She also has a free and clear house that is empty. She is in assisted living. So 2 questions, #1, what will the IRS and State do upon her death, my wife and her brother are 50/50 beneficiaries. BTW: all her mail has been forwarded to my house and nothing has ever come from the state or the Feds, when we cleaned out her house we found no documents related to taxes (she was a hoarder).
#2, if we sell her house prior to her death will that trigger an avalanche of issues for the beneficiaries in regards to her not filing for so many years? It's like they don't know she exists and my wife and Brother-In-Law have not filed taxes for her even though they are joint trustees. I keep telling them at some point things are going to catch up with them but to no avail. All thoughts would be appreciated!
Thanks in advance, Al

 

[adjusterjack]

There's a possibility that she didn't have to file for the last 20 years. There's an amount of gross income each year below which a person doesn't have to file. For the purpose of determining that amount, gross income does not include Social Security or tax exempt income.

Begin on Page 8 of the 1040 instruction booklet for who has to file.

2022 Instruction 1040 (irs.gov)

There may be nothing to be alarmed about. You should be able to piece together her income level for at least the last year or for a general idea. The IRS also has tax booklets available going back several years.

The CA tax booklet likely has similar information.

2022 Personal Income Tax Booklet | California Forms & Instructions 540 | FTB.ca.gov

There are a couple of tax experts here who may post additional information.

As for the house, if she is mentally competent enough to make the decision and assist in the sale, she is likely to have a big capital gains tax bill (after the $250K exemption) due to the skyrocketing property values in CA over the last few decades. If she is not mentally competent someone will have to go to court for conservatorship in order to sell it for her.

 

[davew9128]

Selling the house prior to death would be the absolute worst thing you could ever do. Just don't.

As for the income tax, as previously indicated, its quite possible there was no filing requirement. That being said, it would be the responsibility of the trustees to do the legwork here and look into this. There would be a fiduciary responsibility at death to ensure all legally enforceable debts are paid. Determining what those debts are while she is living is not only the prudent thing to do, it also starts the clock for collection of any debt which might be out there.

 

[Taxing Matters]

How long has your mother-in-law been in the assisted living facility and before that how long had she been living in the house? Depending on the particular facts it is possible she may be able to sell the house now with no capital gains tax to pay. Being in CA that's probably a slim chance, but if she qualifies to do that then that may impact the family's decision on when to sell the home, among other things. Simply having a house sitting empty invites vandalism, deterioration, etc. that lowers the value of the home. Paying for insurance, taxes, and all the upkeep may not be worth keeping the house if she can sell it now for little or no tax gain. Don't let taxes be the only driver here. Take into account ALL the financial impact of each option she has. Sometimes it's worth paying a bit more in tax to save more money on something else or make a better return with something else that would not require the kind of upkeep you'd need for an empty house.

 

[zddoodah]

A few foundational questions:

1. What is your mother-in-law's approximate monthly income from the Vanguard accounts? Same question about social security.

2. How much is the house worth (rough estimate is fine)?

3. Is the house owned by your mother-in-law, or is it owned by a trust? If the latter, when was title transferred to the trust?

4. You mentioned that your wife and her brother are "joint trustees," so I assume there is a trust. Correct? If so, and if the house is titled in the trust, does the trust own any other assets? Is the trust revocable or irrevocable?

5. How long has she been in assisted living?

6. Where is the money coming from to pay for assisted living and property taxes, insurance and upkeep on the house?

Please answer these questions to the best of your ability (as well as questions others have asked).

 

[allanb]

A few foundational questions:

1. What is your mother-in-law's approximate monthly income from the Vanguard accounts? Same question about social security.
SS is $1,850 per month. Investment accounts about $600 but varies yearly.

2. How much is the house worth (rough estimate is fine)?
$1,175,000 free and clear, basis, not sure exactly but under $100k.

3. Is the house owned by your mother-in-law, or is it owned by a trust? If the latter, when was title transferred to the trust?
The house is in the Trust but Title is in her name not the trusts name.

4. You mentioned that your wife and her brother are "joint trustees," so I assume there is a trust. Correct? If so, and if the house is titled in the trust, does the trust own any other assets? Is the trust revocable or irrevocable?
Correct, the trust has a savings account and checking account combined with $100,000 balance. The trust is a revocable trust.

5. How long has she been in assisted living?
About 5 full years and in her home previously for over 40 years.

6. Where is the money coming from to pay for assisted living and property taxes, insurance and upkeep on the house?
Checking-SS- Stated Investment accounts.

Please answer these questions to the best of your ability (as well as questions others have asked).

 

[zddoodah]

The house is in the Trust but Title is in her name not the trusts name.

If title is in her name, then the house is NOT "in the trust." Why is that important? Because that means your wife and her brother, as trustees of the trust, have no authority or ability to sell the house. Your mother-in-law is the only person who can sell the house (unless someone has power of attorney and the POA gives the attorney-in-fact authority to do it). Of course, your mother-in-law could also now execute a deed that transfers title to the trust. All this assumes that your mother-in-law is mentally competent.

I'll leave it to others who are more qualified, but it sounds to me like your mother-in-law probably hasn't been obligated to file tax returns for at least the last five years. I think your wife and her brother would be well advised to consult with an attorney who handles elder law matters so that they make sure they are taking appropriate actions that fulfill their fiduciary duties.

 

[LdiJ]

California, I have posted other questions on this forum in regard to my mother-in-law, and here is another one. My Mother-In-Law has not filed any tax returns in the last, at least, 20 years, the only income that she had was Social Security and some Vanguard accounts that paid her monthly. She also has a free and clear house that is empty. She is in assisted living. So 2 questions, #1, what will the IRS and State do upon her death, my wife and her brother are 50/50 beneficiaries. BTW: all her mail has been forwarded to my house and nothing has ever come from the state or the Feds, when we cleaned out her house we found no documents related to taxes (she was a hoarder).
#2, if we sell her house prior to her death will that trigger an avalanche of issues for the beneficiaries in regards to her not filing for so many years? It's like they don't know she exists and my wife and Brother-In-Law have not filed taxes for her even though they are joint trustees. I keep telling them at some point things are going to catch up with them but to no avail. All thoughts would be appreciated!
Thanks in advance, Al

It honestly depends on just how much income those Vanguard accounts produced each year. If someone's income falls below a certain level, they are not required to file tax returns. For example, someone receiving Social Security is not required to file a tax return if that is their only income. So, if the Vanguard accounts only provided a small amount of income she may not have been required to file a tax return. If the provided significant income, she may have been required to do so. The house is irrelevant to taxes. Your wife and brother in law can consult a tax professional with the Vanguard composite 1099s and her Social Security statements in hand.

However, if everything is in a trust (you mentioned trustees) that could complicate things. Again, they should see a tax professional.