Inheriting an IRA means that you also inherit certain responsibilities. Taxes must normally be paid on an IRA. But, your relationship to the original account owner determines how and when you pay these taxes. If you are about to inherit an IRA, you'll need to know these IRS rules or potentially face still penalties for noncompliance.
Taxes on IRAs are deferred if you are a spouse. A traditional IRA will be subject to taxation. But, the spouse of an IRA holder may elect to treat the deceased's IRA as her own. If she does, then she pays taxes on the proceeds when she withdraws them. The inherited IRA is still subject to the required minimum distribution requirements laid out in publication 590.
Inheriting an IRA from someone who is not your spouse means you must take the inheritance immediately. You must choose between an immediate lump-sum distribution, a distribution over five years or a lifetime distribution. In all cases, you pay income tax on the income as you receive it. You cannot defer the income tax.
The only exception to paying taxes on an IRA is if the original IRA holder made designated Roth contributions to the IRA. The Roth IRA is not subject to income taxes on earnings, and principal contributions are not taxed because they've already been taxed. Inheriting a Roth IRA means, regardless of your relationship to the original account holder, you pay no income taxes on your inheritance.
You may also pay inheritance taxes on your IRA, regardless of whether you receive a Roth or traditional IRA. This inheritance tax varies by state. In addition to this, the federal government may assess an estate tax at death. This, however, is limited to estates valued at over $5 million, as of 2011.