- 5.5.6 Collection on Accounts with Special Estate Tax Elections
- 220.127.116.11 Section Overview
- 18.104.22.168 IRC Section 6166
- 22.214.171.124 Qualification for IRC 6166
- 126.96.36.199 Acceleration of IRC 6166 Tax Payments
- 188.8.131.52 Tax Court Cases
- 184.108.40.206 Special Liens and Bonds for IRC 6166
- 220.127.116.11 Collection Statute Expiration Date
- 18.104.22.168 Payoffs
- 22.214.171.124.1 Interrelated Payoff Computation
- 126.96.36.199 Working A Terminated IRC 6166 Account
- 188.8.131.52 IRC Section 2032A
- 184.108.40.206 IRC Section 2057
- 220.127.116.11 Assessment of Recapture Tax
- 18.104.22.168 Special Lien for IRC Section 2032A or 2057
Part 5. Collecting Process
Chapter 5. Decedent Estates and Estate Taxes
Section 6. Collection on Accounts with Special Estate Tax Elections
June 19, 2013
(1) This transmits a complete revision to IRM 5.5.6, Estate Tax Installments.
(1) The former title of this section was Estate Tax Installments. The title is being changed to reflect that this section has been expanded to address all special election accounts, in addition to installment cases under IRC section 6166.
(2) Campus procedures relating to estate tax installments are in IRM 4.25.2, Campus Procedures For Estate Tax.
(3) Due to the substantial revisions, all of the subsection dates have been changed to reflect the current date.
(4) Added new information on the following topics:
IRMs 22.214.171.124, 126.96.36.199 and 188.8.131.52 - qualification for various special elections
IRM 184.108.40.206 and 220.127.116.11 - liens related to various special elections
IRM 18.104.22.168 - working defaulted special election accounts
IRM 22.214.171.124 - collection statutes related to special election accounts
Scott D. Reisher
Director, Collection Policy
This section contains background information and procedures for Collection employees who must perform actions on accounts that were granted special elections under the Internal Revenue Code (IRC). Collection field employees are responsible for collection of terminated special election accounts that are assigned to them.
Responsibilities for determining qualification, processing and billing of special elections are coordinated between Exam Estate & Gift Speciality Tax and the Estate & Gift Tax unit in the Cincinnati Campus. These responsibilities are outlined in IRM 4.25.1, Estate and Gift Tax Examinations and IRM 4.25.2,Campus Procedures For Estate Tax.
The Advisory Estate Tax Lien group is responsible for making determinations concerning securing special election liens or bonds to protect the Governments interest during the extended deferral period. These responsibilities are outlined in IRM 5.5.8,Estate Tax Liens.
Knowledge of the responsibilities of these functions will enable Revenue Officers to secure the information needed to assist with investigation and resolution of collection cases.
IRC section 6166 provides an extension of time to pay Form 706 estate tax in annual installments. Generally the maximum amount of time for payment of deferred tax is 10 years. The executor may select a shorter period, in which case the deferment will be the period selected. It allows executors a fourteen year period to pay estate tax attributable to an estate’s interest in a closely held business. It grants the estate a deferral period to make "interest only" payments for the first four years. The first tax payment along with interest payment is due on the 5th anniversary of the due date of the return. See IRM 126.96.36.199.10, IRC Section 6166 Interest-Only Installment Payment Period - General Process.
The IRC section 6166 estate tax installment plans are approved by Exam Estate & Gift Specialty Tax. The Estate & Gift Tax Campus unit will make a preliminary determination if the estate qualifies for the installment payment privilege. This election should not be confused with the one year IRC section 6161, Extensions of Time to Pay Estate Taxes, which are approved by Advisory (see IRM 5.5.5). Collection function does not have authority to approve deferred installments plans under IRC section 6166.
The election to pay in installments must be made on a timely filed Form 706 on page 2, Part 3 Elections by the Executor, Line 3 and by attaching a notice of election to the return containing the information specified in Treas. Reg. § 20.6166-1(b). Late filing of the return invalidates the election. However, if a return is timely filed without the election but an amended return containing the election is filed within 6 months of the unextended due date of the Form 706, the election is considered timely.
If the deferred tax due is the result of an examination deficiency, the estate must make the election within 60 days after issuance of notice and demand.
The criteria for qualifying for installment payments are:
Decedent was a citizen or resident of the United States on the date of death.
The Value of interest in closely held business must exceed 35 percent of the adjusted gross estate.
The return is timely filed and the IRC section 6166 election request was included on the timely filed return or an amended return within 6 months of the unextended due date of the return.
An interest in closely held business is defined as:
A proprietorship that carries on a trade or business.
An interest in a partnership that carries on a trade or business. Deceased partner's interest that is included in the gross estate must be 20 percent or more of the total capital interest in the partnership or the partnership has 45 or fewer partners.
Stock in a corporation carrying on a trade or business if 20 percent or more of the value of voting stock of the corporation is included in the gross estate, or the corporation has 45 or fewer shareholders.
For more details on qualification see IRC section 6166 or IRM 188.8.131.52.6, Estate Installment Privileges under IRC Section 6166.
IRC section 6166(h) provides for the election to defer the deficiency tax resulting from an examination, if the estate is not already making payments under IRC section 6166. The IRC section 6166(h)(2) election must be made within 60 days of the issuance of the notice and demand. The deficiency is prorated per the formula in IRC section 6166(a). The estate cannot defer more than the deficiency. The estate may not elect to defer any portion of a deficiency that was due to negligence, intentional disregard of rules and regulations, or fraud with intent to evade tax.
IRC section 6166(e) provides for the proration of deficiency installments if the estate is paying in installments under IRC section 6166 when the assessment is made. The part of the deficiency attributable to the closely-held business shall be prorated and added to the installments. The deficiency portion of an installment that is due and payable when the deficiency assessment is made shall be paid upon notice and demand.
Non-deferred tax must be paid by the return due date, unless the estate has an extension of time to pay under IRC section 6161. If the estate does not pay the non-deferred tax, procedures in IRM 184.108.40.206.9, Estate Qualifies for IRC Section 6166 Election and Fails to Pay or Underpays the Non-Deferred Tax, will be taken by the Estate & Gift Tax Campus unit.
These accounts can be identified on IDRS by status 14 or transaction code (TC) 488. The TC 488 indicates the account is in installment and/or manual billing and updates the module to status 14.
IRC section 6166(g)(1) provides for acceleration of installments. The balance of installments are accelerated upon notice and demand if:
any portion of an interest in the qualifying business is distributed, sold, exchanged or otherwise disposed of, or money or property attributable to the interest is withdrawn from the business and the aggregate of such distributions, withdrawals, etc. equals or exceeds 50 percent of the value of the entire interest, measured at the value reported on the Form 706 or as adjusted. Dispositions are cumulative, so a record should be kept of dispositions.
the estate fails to make all of an annual installment payment within 6 months of the due date.
The election may be terminated because the estate fails to provide security (lien or bond) to the Service for tax due, if the Service has determined that security is necessary. The Service may make this determination at the time of the estate's IRC section 6166 election or it may make the determination at some point during the IRC section 6166 installment agreement. Most likely this will happen when the estate has failed to pay after requesting an extension of an annual installment payment or when the Service determines that the underlying business may be in financial difficulty.
When accelerated, the estate will be sent a series of letters from the Advisory Estate Tax Lien group and the Campus concerning termination and demand for the tax due. Advisory procedures are explained in IRM 220.127.116.11, Special Lien Under IRC § 6324A for Estate Tax Deferred under IRC Section 6166, and Campus procedures in IRM 18.104.22.168.16, Miscellaneous IRC Section 6166 Campus Termination Issues.
Copies of termination letters provide a payoff of the full amount of tax due to a specified date. This payoff can be used for collection purposes until the estate provides a date it will pay the account in full. Since the account was in Status 14, the campus will need to provide a payoff when necessary. Advisory should also have copies of termination letters in their case files and copies of liens, bonds or financial information secured from the estate.
Once an account has been accelerated, it cannot be reinstated for reasonable cause. An account can be reinstated only if a valid extension of time to pay (under IRC section 6161) has been filed for the amount in question prior to the due date or the account was erroneously accelerated due to a processing error. A processing error is one in which a timely payment was treated as late or posted to the wrong account or type of tax. These errors should be rare and an account should be reinstated only if it meets these guidelines. Neither Examination nor Collection has the authority to request reinstatement of an account other than in the above circumstances.
A balance due account may be assigned to the field while the estate is appealing allowance of the IRC section 6166 election. IRC section 7479 does not prevent collection of the tax while the taxpayer is appealing the Secretary’s determination regarding the estate’s section 6166 election to the Tax Court.
Section 7421(a) generally prevents any court from stopping collection unless one of the exceptions applies. An exception applies if the taxpayer has not yet been given an opportunity for hearing under section 6330, or if the taxpayer has timely requested a hearing. Except in cases of jeopardy, levy is prohibited until the taxpayer is issued a notice giving the taxpayer a right to a hearing to contest levy and the taxpayer fails to make a timely hearing request. Levy is also prohibited during a timely requested hearing and judicial review of the determination resulting from that hearing. During the administrative hearing or court proceeding, the Tax Court may permit levy under section 6330(e)(2) if liability is not at issue and the Service shows good cause. Good cause exists when the Service shows that the taxpayer is maintaining the hearing or proceeding for purposes of delay, the taxpayer is raising frivolous arguments, or the government will be harmed by the suspension. In this regard, special attention should be given to whether the levy suspension will harm the government’s ability to enforce its Section 6324 lien rights before they expire.
Section 7485 allows for collection of an amount determined as a deficiency while a Tax Court decision is being appealed to the Circuit Court unless the taxpayer posts a bond.
Should you receive an account to collect estate taxes and the IRC 6166 election is either in Appeals or Tax Court for reconsideration, consult with the Counsel attorney assigned the case to determine if collection can proceed or should be withheld.
Counsel should consider whether the underlying tax amount is in dispute, how much time remains on the IRC section 6324(a) lien and collection potential on remaining estate assets when providing guidance concerning continuation of collection .
The laws granting the estate tax installment election provide the Service certain options to secure eventual payment. These options include:
Requiring the estate to furnish a performance bond in an amount equal to the estate tax and interest being deferred. Bonds must be renewed annually and documentation provided to the Service verifying renewal.
Allowing the estate to substitute the bond with the filing of a special lien under IRC section 6324A (Form 668-J) pledging their right, title, and interest to specific property to the government.
The Advisory Estate Tax Lien group is responsible for making determinations concerning securing special election liens or bonds to protect the Governments interest during the extended deferral period. See IRM 22.214.171.124.1, Advisory Bond/Lien Determinations for Estate Tax Deferred under IRC Section 6166.
For IRC section 6166 elections, the Form 668-J Notice of Federal Estate Tax Lien Under Internal Revenue Laws, is secured and recorded by Advisory. The Form 13925, IRC Section 6324A Lien Agreement Form, reflects specific property that is pledged as collateral, the value, encumbrances and parties who consented to the lien. This lien is not recorded on the Automated Lien System (ALS) since the CSED is extended beyond the normal 10-year expiration date. A TC 582 may be on the account to reflect a lien has been recorded. You may find information in the ICS case history of Advisory actions.
LIEN ATTACHES DURATION Section 6324A for Section 6166 extended payout cases. Specific property described in the lien agreement (Forms 13925 or on 668-J) Coincides with CSED. Must be recorded.
There will not be a IRC section 6324A lien in every case where the Service has agreed to a IRC section 6166 installment election. The Service will make a determination after the election whether it will need security based on the facts and circumstances of each case. The Service may require the estate to secure a bond. The estate may elect the IRC section 6324A lien in lieu of securing a bond.
The IRC 6324A lien is a consensual lien. Therefore, the estate does not have CDP rights. A bond may be substituted for the lien. See IRM 126.96.36.199.1,Advisory Bond/Lien Determinations for Estate Tax Deferred under IRC Section 6166.
When the election has been terminated and the tax accelerated, collection action may be taken on the asset pledged on this lien agreement. Advisory can provide copies of their lien case files to assist with collection of the tax due. Advisory will also provide the lien release when necessary. To determine the duration of the lien, the CSED is extended for the period of time that the tax was deferred, including any extensions to pay that may have been granted.
If the property described on Form 668-J is insufficient to pay the estate tax in full, then any other property that remains attached by the IRC section 6324(a) lien (including the like lien) and/ or the IRC section 6321 liens are subject to enforcement action. Distributees of the estate property also may he held liable as transferees.
Always check the Collection Statute Expiration Date (CSED) when working estate tax accounts. IDRS does not accurately reflect the CSED when multiple assessments are involved or when an IRC section 6166 election has been granted.
For accounts with an approved IRC section 6166 election, the CSED is suspended for the period during which payment of the tax is deferred, see IRC section 6503(d). However, running of the IRC section 6324(a) estate tax lien is not suspended.
Generally the additional time to add to the CSED is the period of time between the input of the TC 488 and the TC 489. If there is no TC 488 on the account use the date the status 14 was input, found in the TXMOD history.
If an extension to pay under IRC section 6161 was granted for the annual installment due under IRC section 6166, the extended time for payment would also be calculated into the CSED.
It is possible to have multiple CSEDs if a TC 300 was assessed and a portion or all of the deficiency was deferred under IRC section 6166. If it was deferred add in the time payment was deferred - which will be different for the TC 150 and the TC 300. Determine if the payments received paid off the TC 150 (deferred) amount - in that case you would only have to deal with the CSED on the TC 300.
Any tax due that was not deferred under IRC section 6166 will have a different CSED date. The Form 4349, Computation of Estate Tax Due With Return and Annual Installment, will show what tax was deferred under IRC section 6166. The E&G Campus unit may have this information on its database or the form may be with the tax return.
In some instances the deferred amount may change due to an Appeals or Tax Court decision. The E&G Campus unit should have the most current information on the deferred amount since they prepare the annual installment billings.
TC 520’s input as a result of CDPs or OICs filed can extend CSEDs. The following transaction Codes for judgment/litigation also impact CSEDs:
TC 520 with closing code 70 through 75 does not suspend the CSED.
TC 520 with closing code 76 through 81 and closing code 84 suspends the CSED
See IRM 5.1.19, Collection Statute Expiration, for additional information.
Once you determine the correct CSED, document your ICS history with the new CSED and how you arrived at the date. Be sure that the module is also updated on ICS.
Payoffs for IRC section 6166 accounts will need to be secured from the Campus E&G unit. Once an account goes into status 14 you can no longer get a payoff through IDRS. If IDRS reflects manual assessments of penalty and interest, accrued penalties and interest need to be computed. For campus contacts see:http://mysbse.web.irs.gov/Collection/toolsprocesses/EstateTax/EstateTax/default.aspx
After an IRC section 6166 account is accelerated the Campus closes their case file. Partial information regarding these accounts are maintained on their database. The Campus may need to secure additional information from the collection case file or order their closed file in order to provide a payoff.
Copies of termination letters issued by the Campus provide a payoff of the full amount of tax due to a specified date. This payoff can be used for collection purposes until the estate provides a date it will pay the account in full. Advisory should also have copies of termination letters in their case files and copies of liens, bonds or financial information secured from the estate.
Once the status 14 is input, FTP and interest need to be calculated and manually input. The last TC 340 on the account will reflect to what date the interest has been updated. When a collection account assigned to the field is paid in full the revenue officer is required to request input of the penalties and interest to the date of payment to prevent refunds.
The manual assessment can be requested on Form 3244 when posting funds received or if the funds have posted request the assessment on Form 4844.
Submit a Form 4844, Request for Terminal Action, to the CCP Fort to request assessment of accruals once the balance due is paid. If there is a TC 421 beginning with a DLN 17 on the account, send your request to the Cincinnati CCP Unit at *SBSE CCP Exam Cincinnati. If the return has not been examined, send your request to CCP Fort in Philadelphia.
Do not abate penalties or interest assessments made by the Campus in accordance with their IRM provisions - unless you verify there was a Service error.
When computing payoffs on estate tax accounts, be aware that the estate may qualify for an interrelated payoff computation.
When Form 706 is filed, deductions against the gross estate have been claimed for the expenses incurred in administering the estate. After the return has been filed, additional expenses may be incurred for which the estate can claim a deduction by filing an amended return. Such expenses include attorney fees, accounting fees, interest due on state estate tax liabilities unpaid at the time returns are filed, and state death tax credits that have been paid in installments. Allowable expenses are explained in IRC section 2053.
Any additional deductions, including interest as a debt, must be requested in writing by the estate or by submitting a supplemental return. On a balance due account, interest as a debt may be limited to only the interest that has been paid, instead of all interest that is due.
If all or a portion of the estate tax has been deferred under IRC section 6166, the estate may request a recomputation of the tax due based on allowed additional expenses. The supplemental return with documented expenses must be provided to the E&G 6166 unit at the Campus in order to do the interrelated computation with special software and provide a payoff.
Tax decreases on amended and/or interrelated computations, will not be input without the taxpayer's agreement and/or payment in full per the new computation.
Until a determination on a supplemental return is made by the Campus, the tax is still due.
When conducting your initial analysis of the account check TXMOD for the following:
check the last TC 340, interest was assessed to this date only
is there a TC 582 lien indicator or a TC 360 for a lien fee? (is it an IRC section 6321 lien or IRC section 6324A lien – you may see “special lien” indicated. Check ICS history, archive history, or with Advisory for previous action on the account.
How much time, if any, remains on the IRC section 6324 (a) lien? During the time the taxes were in status 14 the 10-year estate tax lien continued to run.
check for TC 468, status 14 input and TC 488/489, compute the CSED and document the CSED date in your ICS history
check for transaction codes and TXMOD/ENMOD history for appeals, penalty abatement requests, amended returns, etc. (educate yourself on what happened with this account before it came to you – it will help you make future decisions)
Secure copies of the following documents:
letters from Campus/Advisory terminating the election (Letter 950-H or I, Letter 6335-F for balance due amounts – see IRM 188.8.131.52, IRM 184.108.40.206.15 and 220.127.116.11.16 concerning IRC 6166 procedures)
any related appeals or Tax Court decision or settlement (is it pending or resolved?)
liens filed by Advisory to determine what property was pledged as collateral on deferred tax due (Form 668-J and Form 13925) and any correspondence pertinent to collection of the tax due
copy of any bond secured by Advisory
As part of your collection investigation:
Research the status of the business – is it sold, bankrupt, expanding and funds went elsewhere? Investing funds hoping for big payback later? Do an internet search for information on the business. The estate had a large interest in a closely held business to qualify for this election.
Determine if the business was sold – if so did IRS receive any of the sale proceeds? If not where are the sale proceeds? (if more than fifty percent of the closely held business was sold the election is terminated)
Find out where funds used to make installments payments were coming from? (may provide a potential levy source)
Contact Advisory, their case file may have financial information on the business and/or estate assets used for lien collateral evaluation. Secure and review this information for collection potential.
Secure the 706 return. Campus and/or Advisory may be able to provide partial copies of the 706 return, until you receive the entire tax return for review.
Determine if the executor or other fiduciary received a discharge of liability under IRC section 2204. The application for discharge and the letter granting it, should be attached to the Form 706.
If a special lien was secured:
collateral listed on 668-J lien and/or Form 13925 will provide legal description of property pledged as collateral for tax due – this is the asset to pursue for collection of tax due;
determine the current status of property pledged as collateral;
make demand for payment, the amount in the Letter 6335-F may be used until the estate requests a payoff, send pre-levy notice if there is seizure potential.
If a special lien was not secured:
Was a section 6165 bond provided?
What is date of death – did the IRC section 6324(a) lien expire?
Was an IRC section 6321 lien recorded? What does it attach to?
What estate assets remain to collect from?
If property was sold, was a discharge of the property from any liens recorded?
Contact executor and/or responsible parties to pay installment payments, demand payment, determine what remains to collect from
Consider transferee against those who received estate assets or fiduciary liability against those that were liable to pay installments (see 6166 election information in the 706 return or to whom letters were sent from the Campus for annual installments)
After conducting your fact finding, contact the estate representative and determine how the estate will pay the tax due.
There are also special elections taken for family-owned businesses that must be approved by Examination. The IRC section 2032A election, for valuation of farm real property used in family businesses, is reported on Schedule A-1, Section 2032A Valuation, which is attached to the 706 return. The election will be identified on Page 2 of the 706 return, see Part 3 Elections by the Executor, on line 2.
If the estate qualifies for the election, it receives a deduction. The qualified heir(s) must not dispose of any interest in qualified real property (other than by a disposition to a member of his family) or cease to use the qualified real property for the qualified use for 10 years after the decedent’s death. If the qualified heir(s) does not maintain these qualifications a “recapture tax” is triggered. See the Code section for specific details concerning this election.
The 10-year statute of limitations for collection of the “additional estate tax” against the heirs does not begin until six months after the “triggering” disposition or cessation of qualified use. The “recapture” tax must be reported and paid on Form 706-A,United States Additional Estate Tax Return, or, if not reported on the Form 706-A, may be asserted in a deficiency notice.
The IRC section 2057 election for valuation of the qualified family-owned business interest is reported on Schedule T, Qualified Family-Owned Business Interest Deduction. If the family members dispose of or fail to materially participate in the business or the business is sold within 10 years after the date of the decedent’s death, the recapture tax will be triggered. See the Code section for specific details concerning this election.
Any “recapture tax” is reported and paid on Form 706-D,United States Additional Estate Tax Return – Under Code Section 2057, or, if not reported on Form 706-D, may be asserted in a deficiency notice. This section does not apply to estates of decedents who died after December 31, 2003. Though the election can no longer be taken, you may receive a collection account for the recapture tax due if the qualified family-owned business did not continue to be operated by family members for the 10-year period.
The recapture tax account is assessed as a NMF account, MFT code 53, under the heir’s SSN with an “N” indicator.
The due date for the return is within six months of the disposition or disqualification of the business.
When a section 2032A or 2057 election is granted, a tax lien under section 6324B arises to protect the Government's interest should the recapture tax be assessed due to disqualification.
The Form 668-H, Notice of Federal Estate Tax Lien Under Internal Revenue Laws, is secured and recorded by Advisory and identifies the property subject to the lien. All parties with an interest in the business consent to recording of the lien on the Schedule A-1 or Schedule T.
These businesses and the liens are monitored by the Advisory Estate Tax Lien group. Secure a copy of the lien from Advisory to determine what assets are pledged as collateral. Collection action may be taken on the asset specified on the lien. Advisory responsibilities are outlined in IRM 5.5.8.
LIEN ATTACHES DURATION Section 6324B for Section 2032A and Section 2057 special valuation cases Specific property designated in Schedule A-1 or T and on Form 668-H Coincides with CSED. Must be recorded.
These liens are not recorded on ALS. Typically the liens are recorded before a NMF account is assessed, there may not be an open module under the estate's SSN to input the TC 582. Advisory can provide copies of their lien case file and will provide the lien release when necessary.
These liens arise at the election and are consensual liens. Therefore, the estate or qualified heirs do not have CDP rights. All parties with an interest in the business consent to recording of the lien on the Schedule A-1 or Schedule T.
The property covered by the lien for the IRC section 2032A election is the interest in the qualified real property. The property covered by the lien for the IRC section 2057 election can be either real or personal property.