I am sorry for your loss. You have a serious, immediate problem that requires a tax and/or probate lawyer. The lien won't go away, and penalties and may increase dramatically over time. The longer you wait the more problems you will have. The IRS does is not concerned with money for you or your children. I'll defer to Washington lawyers on the probate matters, but the IRS and other creditors of an estate will usually come before children and other heirs (with some exceptions for a spouse). Again, the problem won't go away and will get worse. You need a lawyer badly.
You must file the tax returns! I explain repeatedly every adult should file a tax return every year, even if there is no income, just to start the statute of limitations on IRS audits and collections. Unfortunately, the returns must be filed. The IRS will collect taxes, interest and penalties, then the rest can go to you as beneficiary. The IRS only cares about taxes, not your children.
Please see a tax and estate attorney right away!
If you do not like this answer or disagree, please look at one of the other answers provided. It is not necessary for you to try prove this answer is "wrong" or something with which you do not agree. This is a free service for you based on limited facts. Nevertheless, many times you need to consult an attorney with the details to get actual advice specific to your concerns. Do not put too many details in your questions or comments because this makes the information public and could hurt you. Government Regulations contained in IRS Circular 230 regulate written communications about Federal tax matters, including e-mail, between us and our clients. This is another attempt by the government to limit your rights and to extend the control of government over individuals and businesses. Nevertheless, such communications are either opinions or other written communications. This is not an opinion. It is other written communication and was not written to be relied upon, by itself, to avoid any tax penalties. In order to receive assurances of protection from tax penalties from a written communication, you should get an opinion letter. If you would like to discuss an opinion letter relating to any matter, please contact me and I will explain what is involved and what it will cost.
Hire a tax attorney to help you with the controversy portion of this. This is a situation that will need to be fixed or the house will likely go bye-bye.
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