5.5.8 Advisory Responsibilities for Processing Estate Tax Liens

Manual Transmittal

July 24, 2018

Purpose

(1) This transmits revised IRM 5.8.8, Decedent Estates and Estate Taxes, Advisory Responsibilities for Processing Estate Tax Liens.

Material Changes

(1) Changed IRM section title to Advisory Responsibilities for Processing Estate Tax Liens.

(2) All references throughout the IRM to IRC § 2057 have been removed from this revision. This code section does not apply to estates of decedents who died after December 31, 2003. Earlier versions of IRM 5.5.8 and/or the code section or regulations may be reviewed for information concerning this special election.

(3) IRM 5.5.8.1: Added content to comply with internal control requirements, which renumbers the rest of the IRM subsections.

(4) IRM 5.5.8.1.1: Removed lien comparison chart; content is in IRM 5.5.9.2.

(5) IRM 5.5.8.4: Added sections on processing and monitoring of special election liens under IRC § 6324B.

(6) IRM 5.5.8.4.3 and 5.5.8.4.4: Added sections on processing requests for discharge and subordination of property from IRC § 6324B Lien.

(7) IRM 5.5.8.7: Section added to delineate processing of discharge requests on decedent cases.

(8) IRM 5.5.8.8 to 5.5.8.16: Incorporates SBSE–05–0417–0011, Interim Guidance for Responsibility to Process all Requests for Discharge of the Estate Tax Lien.

(9) Exhibit 5.5.8-1 removed; lien Form 668-H has been revised and prior information no longer needed.

(10) Exhibit 5.5.8-2 removed; lien Form 668-J has been revised and prior information no longer needed.

(11) Editorial changes were made throughout this IRM section to update organization names, references. Sections have been renumbered due to additional content.

Effect on Other Documents

This material supersedes IRM 5.5.8, June 1, 2010, and incorporates SBSE–05–0417–0011, Interim Guidance for Responsibility to Process all Requests for Discharge of the Estate Tax Lien.

Audience

Small Business/Self Employed Collection Employees

Effective Date

(07-24-2018)

Kristen E. Bailey
Director, Collection Policy, Small Business/Self Employed Division

Program Scope and Objectives

  1. The federal estate tax lien is the basis for the Government’s claim against the property of a taxpayer’s estate and enables collection of the tax from a taxpayer’s estate. The lien program encompasses the legal and administrative aspects for processing, monitoring, releasing of notice of estate tax liens and lien related certificates.

  2. Purpose: This IRM provides procedural instructions for IRS Advisory personnel who secure, prepare and file notice of estate tax liens, related lien documents, and process requests for extension of time to pay.

  3. Audience:

    • Advisory Group Managers

    • Advisors/Revenue Officers

    • Tax Examining Technicians

  4. Policy Owner: Director, Small Business/Sell-Employed Division (SB/SE), Headquarters, Collection Policy.

  5. Program Owner: Collection Policy is the program office responsible for overseeing the estate tax lien (ETL) program, the process and guidance for processing estate tax lien documents.

  6. Primary Stakeholders: SB/SE Collection. Other functions that are affected by, or have input to, the procedures include Chief Counsel, Appeals, Estate and Gift Examination and the Taxpayer Advocate Service (TAS).

  7. Program Goals: Provide policy and procedural guidance to IRS Advisory personnel to properly and accurately secure, process and file notice of estate tax liens, related lien documents and requests for extension of time to pay.

Background

  1. The Internal Revenue Code (IRC), provides the IRS a powerful tool allowing the Government to protect the taxpaying public's interest in collecting the proper amount of tax revenues. This tool is the federal estate tax lien.

  2. The federal estate tax lien provided under IRC § 6324(a), which is sometimes called the “silent lien,” is the basis for the Government’s claim against the property of a taxpayer’s estate and enables collection of the tax from a taxpayer’s estate.

  3. Throughout the life of the federal estate tax lien, situations may arise involving the lien. The resolution to these situations can vary and is guided by the IRC, Treasury Regulations (Regs), IRS policy, and IRM procedures.

Authority

  1. The authority for estate tax liens, related lien certificates and extensions to pay are found in the following code sections:

    • 26 USC § 6324

    • 26 USC § 6324A

    • 26 USC § 6324B

    • 26 USC § 6325

    • 26 USC § 6161

    • 26 USC § 6166

    • 26 USC § 2032A

    • 26 USC § 6321

Roles and Responsibilities

  1. The Director Collection Policy is responsible for overseeing policy and procedures regarding securing, processing and filing of notice of estate tax liens and related documents.

  2. Employees that process estate tax liens are responsible for providing accurate information and accuracy of lien documents.

  3. Employees authorized to make determinations regarding specific lien actions are responsible for ensuring procedures are properly followed.

  4. Managers are responsible for ensuring that lien actions taken by employees are in accordance with policy and procedures.

  5. Any employee who manually prepares or approves estate tax liens and lien related documents is responsible for ensuring the request or document is accurate and complete. The requestor/preparer is ultimately responsible to see that the estate tax lien document is filed appropriately.

  6. The Centralized Lien Operation (CLO) has primary responsibility for filing estate tax lien documents.

Program Management and Review

  1. The Integrated Collection System (ICS) is used to control lien-related processes worked by Advisory and document case work.

  2. The ENTITY Case Management System can also generate certain, unique reports related to lien processes to assist in managing assigned inventory.

Program Controls

  1. Notice of estate tax liens are not maintained on ALS because these liens do not self release in ten years and may be in effect longer than 10 years. Advisory is primarily responsible for creating, monitoring and maintaining lien case files in accordance with retention guidance in IRM 5.5.8.19. Centralized Lien Operation is primarily responsible for sending notices of estate tax lien to recording offices with payment for associated lien fees.

  2. Controls to monitor estate tax liens are established on ICS.

  3. Authority to issue federal estate tax lien certificates is restricted to the following delegation orders:

    • IRM 1.2.44.5, Delegation Order 5-4, Federal Tax Lien Certificates

    • IRM 1.2.4.3.4, Delegation Order 4-3, Extension of Time to Pay Estate and Gift Taxes

    • IRM 1.2.52.5, Delegation Order 25-4, Authority to Grant Extensions of Time to File Income and Estate Tax Returns

    • IRM 1.2.65.3.11, Delegation Order 1-23-26, Authority to Sign Form 792

    • IRM 1.2.65.3.12, Delegation Order 1-23-27, Authority to Approve, Sign and Accept Bonds and Collateral Agreements

    • IRM 1.2.4.3.4, Delegation Order 4-16, Issuance of Transfer Certificates in Certain Estate Tax Cases

Characteristics of Estate Tax Liens

  1. In many cases, the general IRC § 6324(a) lien is the best tool to protect the Government's interest. It is automatically created when any resident of the United States dies. No recorded notice is required for it to become effective. It attaches to all of the assets that are part of the decedent's gross estate and are required to be reported on Form 706, U.S. Estate Tax Return, and is security for any estate taxes that may be determined to be due. If a probate asset (assets in the name of the decedent at time of death) is transferred or liquidated without payment of the tax, but for the exceptions detailed at IRM 5.5.8.3 the lien continues to attach to the asset. If a non-probate asset (property described under IRC § 2034 to § 2042) is transferred or liquidated without payment of the tax, a liability equal to the value of the asset at the time of the decedent's death becomes due from the transferee. A separate assessment against the transferee is not needed. Assets of the gross estate can be sold or encumbered free of the IRC § 6324(a) lien if the proceeds from the sale or loan are used for the payment of charges against the estate or expenses of its administration that are allowed by any court having jurisdiction.

  2. The estate tax lien and personal liability transferee provisions of Section 6324(a)(1) and (2) apply to estate taxes owed by non-resident aliens who file Form 706-NA.

  3. Estate tax attributable to an estate’s interest in a closely held business may be paid over a 14-year period if an extension of time to pay under IRC § 6166 is in effect. This could potentially leave the Service without lien protection for four years (or more if there are any section 6161 extensions) if a notice of lien is not recorded before the 10 years have elapsed.

  4. The filing of Form 668-J (the special IRC § 6324A lien for taxes deferred under IRC 6166) will secure the deferred taxes for the duration of the extension. The collection statute of limitations under IRC § 6502 is suspended during the period of the extension.

    1. The lien attaches only the property specified on the IRC § 6324A lien agreement. A lien on property with equivalent value can be substituted for the actual IRC § 6166 property upon agreement between the Service and all parties with an interest in the property.

    2. When estate property is listed on the recorded Form 668-J, it is automatically released from the effects of the general IRC § 6324(a) estate tax lien.

    3. The IRC § 6324A lien is a negotiated lien that is created only when both the Service and all persons and/or entities with an ownership interest in the property listed on the notice of lien agree to its filing.

  5. The filing of Form 668-H - the special IRC § 6324B lien for special use valuations under IRC § 2032A or qualified family owned business interest property under IRC § 2057, will secure the potential recapture tax during the required 10 year holding period.

  6. All references to IRC § 2057 have been removed from this IRM revision. This code section does not apply to estates of decedents who died after December 31, 2003. Earlier versions of IRM 5.5.8 and/or the code section or regulations may be reviewed for information concerning this special election.

General Estate Tax Lien under IRC § 6324(a)

  1. The estate tax lien provided for by IRC § 6324(a) is similar in character to the lien imposed by IRC § 6321. The general lien imposed by IRC § 6321 and the special lien for estate tax are not necessarily exclusive of each other, but can be cumulative. Whereas the IRC § 6324(a) lien arises upon death and attaches to all probate and non-probate assets comprising the gross estate, after the tax liability has been assessed, notice and demand is given, and there is a neglect or refusal to pay, the IRC § 6321 lien arises and also attaches to all as yet undistributed probate assets. Neglect and refusal to pay is generally inferred from notice and demand and an unpaid balance.

  2. Even though no notice is recorded, the lien has priority over all subsequent interests in the property.

    Except Unless
    purchaser of or holder of a security interest in probate property at the direction of a court having jurisdiction and proceeds are used to pay charges against the estate no exception
    purchaser or holder of a security interest in probate property after executor has been released from personal liability under IRC § 2204 if seller is an heir, legatee, devisee, or distributee no exception
    purchaser of or holder of a security interest in non-probate property no exception
    purchaser of or holder of a security interest in securities knowledge of lien exists
    purchaser of a motor vehicle knowledge of lien exists
    retail purchaser of tangible personal property purchaser buying with the intent to hinder, evade, or defeat collection
    purchaser of personal property (defined at IRC § 6334(a)) valued at less than $1,000 at a casual sale knowledge of lien exists or is one in a series intended to liquidate most of the assets
    local law lien securing the price of repairs or improvements lienor gives up possession of property after lien arises
    local real estate tax & special assessment local law does not give them priority over other liens that are filed first
    residential property subject to a lien for repairs & improvements the contract price is more than $5,000
    attorney's liens fees are unreasonable, the lien is not valid under local law, or is subject to offset
    certain insurance contracts knowledge of lien exists
    deposit-secured loans knowledge of lien
  3. The IRC § 6324(a) estate tax lien attaches at the date of death to every part of the gross estate, even when the property has not yet been placed under the control of the fiduciary. It attaches to the extent of the estate tax shown due on the return, and of any deficiency in estate tax found due upon review and audit. The estate tax lien continues for a maximum period of ten years after the decedent’s death or until the tax is paid.

  4. IRC § 6324(a)(2) provides that when the estate tax is not paid when due, any spouse, transferee, trustee, surviving tenant, person in possession of the property by reason of the exercise, non-exercise, or release of a power of appointment, or beneficiary, is liable for the payment of the estate tax to the extent of the value of any non-probate estate assets held by, or passing to such person.

  5. There is no need to assess the liability against the person liable under IRC § 6324(a)(2). The collection statute under IRC § 6502 applies. IRC § 6324(a)(2) also makes all of the property of such person subject to a lien just like the estate tax lien if their transfer of estate assets divests the assets of the estate tax lien. This ″like-lien″ continues until the IRC § 6324(a) estate tax lien expires or the estate tax is paid.

    Note:

    Example: A beneficiary of a decedent's trust receives real property valued at $100,000 on the Form 706. The beneficiary sells the property for $125,000 and invests the proceeds. Because the property was non-probate property, the purchaser takes title free of the IRC § 6324(a) estate tax lien. However, a like-lien in the amount of $100,000 now attaches to all of the property of the beneficiary as long as the IRC § 6324(a) lien has not expired. A separate assessment against the beneficiary is not necessary.

  6. For more information on the different types of estate tax liens and lien attachment see IRM 5.5.9, Administrative and Judicial Actions for Estate Taxes and IRM 5.5.6, Collection on Accounts with Special Estate Tax Elections.

Special Valuation Estate Tax Lien Under IRC § 6324B - Form 668-H

  1. There are special elections taken for family-owned businesses that must be approved by E&G Exam. The IRC § 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.

  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 and paid by the heirs who inherited the property. Form 706-A, United States Additional Estate Tax Return is used to report all dispositions or cessations of qualified use under Section 2032A of the Internal Revenue Code.

  3. IRC § 6324B imposes a lien attaching to the specific property valued under IRC § 2032A. The lien form used for this election is Form 668-H, Notice of Federal Estate Tax Lien Under Internal Revenue Code Section 6324B.Form 668-I, Certificate of Release of Federal Estate Tax Lien Under Internal Revenue Section 6324B is used for releasing the special election notice of lien.

  4. Additional guidance on these elections can be found in the Code section and IRM 5.5.6, Collection on Accounts with Special Estate Tax Elections.

  5. All references to IRC § 2057 have been removed. This section does not apply to estates of decedents who died after December 31, 2003. Earlier versions of IRM 5.5.8 and/or the code section and regulations may be reviewed for information concerning this special election.

Processing Lien Form 668–H

  1. When the executor elects the special valuation under IRC § 2032A and secures an agreement to the election signed by all parties having an interest in the specially valued property, Estate & Gift Exam (E&G Exam) will complete and forward Form 6111, Notice of Election Under IRC § 2032A to Advisory with copies of the following documents:

    1. First 3 pages of Form 706,

    2. Schedule A-1,

    3. Agreement to special valuation signed by all parties with an interest in the property to be shown on the notice of lien. Only the decedent's interest in the property is shown on the lien. If the decedent co-owned the property, the co-owner's interest is not shown on the lien and the co-owner is not required to sign the agreement,

    4. Complete legal descriptions of property to be shown on the notice of lien,

    5. Any power of attorney.

  2. Verify that each Form 6111 includes a copy of the agreement signed by all ″qualified heirs″ and all other parties having an interest in the property covered by the election. The agreement must designate:

    1. an agent for dealings with the Internal Revenue Service, and

    2. a complete legal description of the property to be shown on the notice of lien.

  3. Contact the E&G Exam group manager to resolve any inconsistencies.

  4. Prepare and file Form 668-H, Notice of Federal Estate Lien Under Internal Revenue Code Section 6324B , in the name of the estate and list all qualified heirs as shown on Form 6111. Only one Form 668-H will be used unless a local jurisdiction requires separate forms. Filing a copy of the agreement (Schedule A-1) to Form 668-H is not necessary. If the qualifying property consists of the decedent's interest in a closely held corporation, partnership, LLC, etc., consult with Area Counsel and/or local law guides http://ccintranet.prod.irscounsel.treas.gov/OrgStrat/Offices/sbse/Pages/LawGuides.aspx to determine if evidence of ownership, such as a stock certificate, must be held as collateral in order for the lien to be effective under local law.

    Note:

    When preparing notices of estate tax liens, the SSN of the decedent and any qualified heirs whose names are shown on the notice of lien will be redacted using the format XXX-XX-1234. For EINs redact all but the last four digits XX-XXX1234.

  5. Advisory employees must review deeds to determine how the property pledged is titled to ensure all interested parties signed the agreement and to correctly style the notice of lien.

  6. Because of the consensual nature of the section 2032A lien, the property to which the lien attaches should also be listed and described in detail. If the real or personal property subject to the lien is held by an entity, then the property should be identified as being owned by that entity. If the property to which the lien attaches is an interest in a corporation, partnership, or trust, the notice of lien should describe the covered property as the interest in the entity, the nature of the interest, and the address of the entity. Parties with an interest in the property to which the lien attaches will be listed in the body of the notice of lien under the section titled Description of property to which lien attaches. No TINs or EINs should be listed for these parties, names only.

  7. The Service may file a notice of lien that is an interest in a partnership, limited liability corporation, or trust. Caution should be exercised in applying a lien to an interest in a partnership, LLC, or trust. Oftentimes there are restrictions on the transfer of such interests. For example, the partnership or LLC agreement should contain provisions as to the manner in which a decedent’s interest is handled upon death, or the ability of owners of partnership or LLC interests to encumber property owned by the partnership or LLC. There may be some circumstances in which an LLC will be disregarded for estate tax purposes.

  8. In addition, a lien on an interest may not be sufficient to secure payment of the recapture tax. The consensual lien attaches whatever rights the interest entails. If those rights do not include the right to sell the interest, the Service will be unable to sell the interest. The Service may be left with whatever rights to payment, distributions, or liquidation that the interest includes. On the other hand, if the interest includes the right to sell the interest, the Service may then sell the interest (upon default in paying any additional tax liability), assuming the interest is marketable. If the interest is evidenced by any certificates of ownership, the Service should take possession of the certificates.

  9. General guidance on ownership of LLCs, operating agreements, documents that outline ownership or authorities of LLC members is in IRM 5.1.21, Collecting from Limited Liability Companies. The agreement must be signed by all of the persons having an interest in the designated property (whether or not in possession) described on the notice of lien, in a partnership or LLC scenario the advisor should determine who are members and who have authority to act on behalf of the entity. If Advisory determines that persons with an interest in the property did not sign the lien agreement on Schedule A-1, they can have that party sign it and add it to the lien case file or consult with E&G Exam if the election is valid (see Schedule A-1 Part 1).

  10. The Service may file a notice of lien with respect to shares of stock. To protect its lien interest in the shares of stock, the Service should take possession of the certificates for the maximum potential amount of additional estate tax. See IRM 5.5.8.14.1 for guidance concerning collateral controls.

  11. For personal property owned by a corporation, partnership, or trust, the filing location for the property is the residence of each of the qualified heirs and the principal executive office of the owning entity.

  12. For personal property in which an interest is owned directly by qualified heirs, including an interest in a corporation, partnership, or trust, the filing location for the personal property is the residence of each of the qualified heirs. If the estate has not yet distributed the property, then the location for the purpose of filing is also the decedent’s residence and the executor’s residence.

  13. See IRM Exhibit 5.12.7-2, State and Territory Filing Locations, for additional guidance for state and territory filing locations.

  14. Form 668-H must be prepared manually. However, a PDF version of the form is available on the intranet at http://publish.no.irs.gov/catlg.html.

  15. Mail the completed Form 668-H to the Centralized Lien Operation (CLO) for filing on a Form 3210. All notices of lien will be sent to:
    Internal Revenue Service
    Attn: Manager Team 208 - Stop 8420G
    P.O. Box 145595
    Cincinnati, OH 45250-5595

  16. This CLO FORT (Field Office Resource Team) has responsibility for logging in receipt of the estate tax liens; monitoring the filing process and forwarding the recorded notices of lien to the advisor on a Form 3210. CLO FORT will send acknowledgement of receipt of the notice of lien by returning the Form 3210.

  17. Within 7 business days of receipt, the CLO FORT will mail the notice of lien to the recording office for filing. See IRM 5.19.12.8.2, Filing Estate Tax Lien Documents, for CLO FORT processing procedures and lost lien research procedures.

  18. All documents sent with the notice of lien to the recording office will be returned to CLO. The CLO will be responsible for inputting lien indicators; applicable lien fees and forwarding the recorded notice of lien document back to the originating advisor on Form 3210, Document Transmittal, to maintain with the lien file. If a notice of lien is returned to the Advisor due to insufficient funds, return it to the CLO for corrective action.

  19. Advisory is responsible for sending the notice of lien to the lien unit on Form 3210, including the estate name, complete SSN, lien type and request for input of TC 582, TC 583 and TC 360 as applicable. Advisory is also responsible for determining if there is an open module on IDRS and will instruct CLO to input applicable lien indicator/fees. In the case of Form 668-H liens, if there is no open module on IDRS, do not request input of lien indicator/fees on the Form 3210.

  20. Advisors are responsible for ensuring receipt of the recorded notice of lien from CLO and that lien fees have been input, if applicable.

  21. In exigent circumstances, advisors may issue OIs requesting that a revenue officer deliver a notice of estate tax lien to a recording agency for filing and paying the recording fee.

  22. Advisory will maintain an ICS case in the name of the estate until the notice of lien is released. Advisory will also maintain a file of retained lien copies with Form 6111 and associated documentation. See IRM 5.5.8.19 for records retention guidance.

Monitoring Lien Form 668-H

  1. An NFOI will be established under time code 192.

  2. Input annual follow ups based on date of death to conduct research to determine if a cessation of qualified use has occurred requiring a recapture tax return be filed, research includes the following actions:

    • Check IDRS to determine if qualified heirs are deceased. This recapture period ceases if the qualified heir dies and can be less than the 10 years.

    • Review RTVUE to see if the qualified heirs are reporting farm income/expenses on schedules F, which would suggest that the qualified use has continued.

    • Check RTVUE for rental property reported on schedule E, this would suggest a cessation. If the qualified heir ceases to use the qualified real property which was acquired (or passed) from the decedent, then an additional estate tax is imposed.

    • Determine if the qualified heir disposed of any interest in qualified real property, other than by a disposition to a member of his family. Perform records checks, sources such as Accurint or online county records may also help to determine if the qualified use property has been sold. If ownership has changed from the estate/qualified heirs to a third party this may trigger a recapture event.

    • Research IDRS under the farming entity’s EIN to see if the business is still filing returns, this may provide an indication if the farm has been sold.

  3. If there are indications that the qualified heir has died, leased out the property, does not have farming expenses or sold the property it will be necessary to contact or write to the executor/representative of the estate to determine if a recapture event has been triggered and if it is necessary to secure a recapture tax return.

  4. If the above searches reflect that the qualified heirs have continued the qualified use of the land or business release of the lien may be appropriate if it is at least ten years after the date of death.

  5. A review of the Code may answer additional questions or it may be necessary to make an SRS referral to E&G Exam for questions, to check the tax computation on a recapture tax return or for a non-filer of the recapture tax return. Recapture events need to be identified and addressed as soon as possible since the asset may have been dissipated.

  6. All follow-ups will be input through the ICS system to provide an ability to pull a follow up report to determine if necessary actions to close the lien cases are taken timely.

  7. Once notices of lien are released close NFOI controls – unless a Form 668-J lien is still in effect on the estate.

  8. If a recapture tax return is secured, ensure posting of the return, maintain the lien case file and all related correspondence for collection of the balance due. Follow retention records procedures in IRM 5.5.8.19.

  9. When inventory is transferred to another tax examiner (TE), actions must be taken to re-input follow-ups in the receiving TEs ICS inventory.

Processing Release or Discharge of Property from IRC § 6324B Lien

  1. Form 668-I, Certificate of Release of Federal Estate Tax Lien Under Internal Revenue Section 6324B, will be used to release the Form 668-H.

  2. Research must be conducted to determine if a recapture tax return must be secured or if it is necessary to make an SRS referral to E&G Exam for questions, to check the tax computation on a recapture tax return or for a non-filer of the recapture tax return.

  3. The section 6324B lien must be released if the 10-year recapture period has elapsed without a triggering event for the recapture tax, such that there is no longer any potential liability for recapture. However, if a triggering event did occur within the 10-year period such that the recapture liability arises, the notice of lien should not be released until that liability has been fully satisfied or has become unenforceable, which may be at some point after the 10-year period. The notices of lien should not automatically be released upon the date 10 years after the decedent's death.

  4. The 10-year period provides a measure of time during which the recapture tax triggering event must occur. The "liability" for the tax may continue beyond that period, as provided by sections 2032A(c)(4) and (f). Accordingly, if a recapture event has occurred during the 10-year period and the recapture tax liability has not been fully satisfied within that 10-year period, the section 6324B lien should not be released, as the recapture tax liability is still enforceable. The Service can continue to collect the recapture liability beyond the 10-year period.

  5. Liability for a recapture tax arises if the qualified heir disposes of any interest in the property or fails to use the property for a qualified purpose within 10 years from the decedent's date of death. This recapture period also ceases if the qualified heir dies and can be less than 10 years. Recapture tax can be assessed against a qualified heir’s estate. The estate takes the place of the taxpayer upon death.

  6. Section 2032A(c)(4) provides that the recapture tax described in section 2032A(c)(1) shall become due and payable on the date which is 6 months after the disposition or cessation described. Section 2032A(f) further provides that the statute of limitations for assessment of the recapture tax is generally 3 years from the date the Secretary was notified of the disposition/cessation (but may be later). Accordingly, while the event that triggers the liability for the recapture tax must occur within 10 years of the decedent's death, collection of that liability may clearly continue beyond that 10-year period.

  7. If the qualified heir(s) is requesting a release of lien because the 10-year special use period has elapsed, and assuming no recapture tax is due, instruct the designated agent to submit a written request that the notice of lien be released, including a statement that during the 10 year period no events occurred that would cause recapture of any portion of the tax. The letter should be signed under penalty of perjury.

  8. The qualified heir(s) may also request a release of lien because all of the property described on the notice of lien is being sold or removed from special use. In order to receive a release of the notice of lien, the qualified heir(s) must report the recapture event by filing Form 706-A, United States Additional Estate Tax Return, and all tax and interest due must be paid in full. Interest on the Form 706-A begins to accrue at the regular underpayment rate on the date the return is due. Each qualified heir must file a Form 706-A reporting and paying the tax and interest due that is attributable to their share of the inherited property.

  9. Secured Forms 706-A, with any payments and or approved extensions, are forwarded via Form 3210, overnight mail, to: IRS, Cincinnati Submission Processing Center, 201 W. Rivercenter Blvd., Covington, KY, 41011, Attn: Mail Stop 31. Preparation of a posting voucher is not necessary unless penalties are applicable and being paid. Ensure that the return and check are identified as belonging to the heir and indicate NMF by placing "N" behind the heir's SSN on the return and the check. Enter the tax period in YYYYMM format at the top of the return. The period ended is the earliest date shown on schedule A, column C. For example, if the property disposition date is 3/10/2005, the tax period would be 200503.

  10. Accounts for Form 706-A are maintained on the ANMF system under MFT code 53. Advisory employees must secure access to the ANMF system (via OL5081) to ensure the tax return has posted. Procedures for using the ANMF system are provided in IRM 3.17.46.13.1, Entering and Exiting the System, and IRM 3.17.46.13.2, NMF Account Transcript Requests.

  11. A discharge is necessary if part of the property described on the notice of lien is being sold or removed from special use. See discharge procedures in IRM 5.5.8.12 and related sections.

  12. If issuance of a conditional commitment to discharge property from the effects of the lien is necessary, Advisory should request a draft of Form 706-A from each heir who owns a share of the property being sold or removed from special use. Upon review and approval of the draft(s) by E&G Exam, Advisory will conditionally commit to the discharge. If there is a disposition of all the special use property and the tax on the Form 706-A matches the recapture tax on the lien a referral to E&G Exam may not be necessary. Upon filing of the Form 706-A, with full payment of any tax and interest due, the discharge certificate will be provided.
    Example: A Form 668-H has been recorded in the names of an estate and 4 heirs. The property listed on the notice of lien consists of 6 parcels of real property for which special valuation was elected under IRC § 2032A. The heirs want to convert 1 of the parcels to a non-qualified use and submit an application for discharge under IRC § 6325(b)(2)(A), along with draft copies of each of their required Forms 706-A showing the recapture tax that will be due. An SRS referral is sent to E&G Exam to review the returns and advise that they reflect the correct amount of recapture tax. Advisory issues a commitment to discharge conditioned upon the receipt of original Forms 706-A and payment of the tax and interest due.

  13. Whenever contact is made with an estate representative who is requesting a release of an estate tax lien, the advisor should give the representative the option of filing the release, making the representative aware that if they choose to do so, it is their responsibility to pay the recording fees.

Processing Requests for Subordination of IRC § 6324B Lien

  1. Requests for subordination of property described on Form 668-H will be processed by Advisory.

  2. Although it is possible that the qualified heir(s) may apply for a certificate of subordination under IRC § 6325(d)(2), almost all requests for subordination will be made under IRC § 6325(d)(3) which directly addresses IRC § 6324B, and provides for the issuance of a certificate of subordination if it is determined that the lien interest of the United States will continue to be adequately secured.

  3. Instructions for applying for a subordination under IRC § 6325(d)(3), are contained in Publication 1153, How to Apply for a Certificate of Subordination of Federal Estate Tax Lien Under Section 6325(d) of the Internal Revenue Code.

  4. Review the status of all qualified property and consider factors such as:

    • Has a special election lien been secured?

    • Have events occurred that would disqualify the estate for the special election?

    • Should a recapture tax return be secured?

    • Is all of the special use property impacted or only a portion?

  5. If it is determined that the lien interest of the United States will continue to be adequately secured, issue Form 669-F, Certificate of Subordination of Federal Estate Tax Lien .
    Example: A Form 668-H has been recorded in the names of an estate and 2 heirs securing potential recapture tax of $200,000. The property shown on the notice of lien is an apartment building for which special valuation was elected under IRC § 2032A. The fair market value of the property is $1.5 million, and it is unencumbered but for the Form 668-H. The heirs want to borrow $250,000 in order to make renovations to the building and use the property as security for the loan. They apply for a subordination under IRC § 6325(d)(3). Since the United States will be adequately secured after the subordination, Advisory may issue Form 669-F.

Special Lien Under IRC § 6324A for Estate Tax Deferred Under IRC § 6166

  1. IRC § 6166 provides that the executor of an estate may make an election to pay in as many as 10 annual installments, that portion of the estate tax attributable to assets used in a qualifying closely held business. E&G Exam personnel or E&G Campus personnel make the determination if the estate qualifies for this special election. If property qualifies for installments, only interest on the unpaid balance is due on the first four anniversary dates after the due date. The first tax payment along with interest is due on the fifth anniversary of the due date of the return. This election to pay in installments must be made at the time the Form 706 is filed. Late filing of the return invalidates the election. 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.

  2. Under IRC § 6503(d) the Collection Statute Expiration Date is suspended for the period during which payment of the tax is deferred. However, running of the IRC § 6324(a) estate tax lien is not suspended.

  3. Collection field function will utilize Form 668(Y) when filing notices of lien on balance due accounts. Advisory has the responsibility of securing a lien using Form 668-J, Notice of Federal Estate Tax Lien Under Internal Revenue Code Section 6324A, which is typically secured during the installment period.

  4. Key elements of the notice of lien include:

    1. A lien describing the agreed upon property is recorded using Form 668-J, Notice of Federal Estate Tax Lien Under Internal Revenue Laws.

    2. An agreement to the lien under IRC § 6324A is filed with the Internal Revenue Service on Form 13925, IRC Section 6324A Lien Agreement Form. The agreement must be signed by all of the persons having an interest in the designated property (whether or not in possession) described on the lien.

    3. Although real property is preferred, any property, either real or personal, with equity equal to the deferred taxes plus interest, and that can be expected to survive the deferral period, may be designated in the agreement. Property, other than property that was part of the gross estate, may be used to secure the lien. If at any time the value of the property covered by the agreement becomes less than the deferred taxes plus interest, the IRS can require the addition of property to the agreement.

      Note:

      Even though the property offered by the estate as security for the lien may be, if necessary, difficult to enforce against (such as stock in a closely held corporation), distrainability is not a factor in determining the adequacy of the value of the property offered. As long as the requirements under IRC § 6166(a)(1) as to the value of the property are met, and there are no indications that the property will not survive the deferral period, whatever property the estate offers as security for the lien is acceptable.

    4. Any property that is part of the decedent's gross estate that is part of the agreement and described on the recorded lien is no longer subject to the unrecorded IRC § 6324(a) estate tax lien.

    5. Filing of the notice of lien acts as a discharge of the executor and/or or fiduciary under IRC § 2204. See Treas. Reg. 20.2204-3.

  5. The Service may file a notice of lien with respect to shares of stock. To protect its lien interest in the shares of stock, the Service should take possession of the certificates. See IRM 5.5.8.14.1 for guidance concerning collateral controls.

  6. Because of the consensual nature of the section 6166 lien, the property to which the lien attaches should also be listed and described in detail. If the real or personal property subject to the lien is held by an entity, then the property should be identified (in the property description box) as being owned by that entity. If the property to which the lien attaches is an interest in a corporation, partnership, or trust, the notice of lien should describe the covered property as the interest in the entity, the nature of the interest, and the address of the entity.

  7. The Service may file a lien that attaches to an interest in a partnership, limited liability corporation, or trust. Caution should be exercised in applying a lien to an interest in a partnership, LLC, or trust. Oftentimes there are restrictions on the transfer of such interests. For example, the partnership or LLC agreement or state law contain provisions as to the manner in which a decedent’s interest is handled upon death, or the ability of owners of partnership or LLC interests to encumber property owned by the partnership or LLC.

  8. In addition, a lien on an interest may not be sufficient to secure payment of the deferred estate tax. The consensual lien attaches whatever rights the interest entails. If those rights do not include the right to sell the interest, the Service will be unable to sell the interest. The Service may be left with whatever rights to payment, distributions, or liquidation that the interest includes. On the other hand, if the interest includes the right to sell the interest, the Service may then sell the interest (upon termination of the deferred tax election), assuming the interest is marketable. If the interest is evidenced by any certificates of ownership, the Service should take possession of the certificates.

  9. General guidance on ownership of LLCs, operating agreements, documents that outline ownership or authorities of LLC members is in IRM 5.1.21, Collecting from Limited Liability Companies. The Reg states the agreement must be signed by all of the persons having an interest in the designated property (whether or not in possession) described on the lien, in a partnership or LLC scenario the advisor must determine who are members and who have authority to act on behalf of the entity. If the estate does not want to provide this information or the partners/LLC members do not want to sign the lien agreement the Service will not accept that collateral. Different collateral in which all owners agree to sign the lien agreement can be provided or if necessary the election can be terminated if adequate collateral is not provided.

  10. See IRM Exhibit 5.12.7-2 for state and territory filing locations.

  11. For personal property owned by a corporation, partnership, or trust, the lien filing location is the residence of each of the parties that signed the lien agreement and the principal executive office of the owning entity.

  12. For personal property in which an interest is owned by the persons signing the lien agreement, including an interest in a corporation, partnership, or trust, the filing location is the residence of each of the persons who signed the lien agreement. If the estate has not yet distributed the property, then the location for the purpose of filing is also the decedent’s residence and the executor’s residence.

Bond/Lien Determinations for Estate Tax Deferred Under IRC § 6166

  1. Advisory will receive a lien package, as described below, and set up an ICS case control.

    1. Pages 1, 2 and 3 of Form 706 and schedules A, B, F & G and any attachments (but not appraisals unless specifically requested by an Advisor) including other pertinent schedules listing assets.

    2. Form 4349, Computation of Estate Tax Due With Return and Annual Installment.

    3. Form 1273, Report of Estate Tax Examination Changes, and Form 3228, Adjustments to Taxable Estate or Form 6180, Line Adjustments - Estate Tax. (These forms will not be provided if the case is surveyed or accepted as filed.)

    4. The examiner’s narrative report of examination changes. (e.g. Form 886A, Explanation of Items, or similar documentation.) (This form will not be provided if the case is surveyed or accepted as filed.)

    5. Any Form 2848, Power of Attorney and Declaration of Representative.

    6. IRC § 6166 election and attachments to the election.

    7. Listing of all businesses listed on the Estate tax return including name and EIN. This information may be listed separately or on the related schedule.

  2. The E&G Exam group will be responsible for sending lien packages to Advisory when the case has been assigned to the group for examination. When returns are accepted as filed or surveyed during classification, Campus will be responsible for preparing and forwarding the lien package to Advisory. E&G Campus will hold the original tax return for 90 days once the lien package is sent to Advisory, in case additional information is needed.

  3. Advisory shall contact the estate’s executor or representative within 60 days of receipt of lien package and request the estate voluntarily provide a bond, or in the alternative an IRC § 6324A lien, to secure the deferred estate tax. If the executor or representative agrees to provide the bond or lien, proceed with processing procedures to get the bond or lien recorded. Send a copy of the lien agreement to E&G Campus for association with the IRC § 6166 file. Encumbrances must be checked to determine adequacy of collateral. The advisor may utilize sources such as Accurint, Secretary of State, UCC filings, etc. to verify encumbrances. It may be necessary to request the estate representative provide encumbrance information. Document the above action in the case history.

  4. If the estate declines to provide a bond or lien, Advisory shall review all information available to it before requesting any information from the taxpayer. Advisory shall review the following:

    1. The lien package provided by E&G Exam.

    2. Any information that the Service may have such as extension requests (Form 4768), compliance with current installment/interest payments, tax returns or tax compliance information with respect to the decedent (Form 1040), the estate or trust (Form 1041) and closely held business (Forms 1040, 1041, 1120, 1120-S, 1065, 941s).

    3. Any information available by public record or on the Internet, such as filings with the Secretary of State.

  5. Advisory will determine what additional information is required to make a determination regarding whether security is required in that case.

  6. Advisory shall send a letter to request any additional information needed to determine whether security should be required. The deadline for additional document request shall be kept to 30 days. If within the 30 day period, the estate requests an extension of time, the Advisor may grant an extension for up to 30 days. Any additional extension must be approved by the Advisory Group Manager. Such approval and the reason for granting the additional extension must be documented in the case history.

  7. Advisory shall determine whether a bond or lien should be required in a case based on a review and analysis of applicable factors listed below and any other pertinent information. This is not an exclusive list and no single factor will be determinative of whether to require security in any particular case.

    1. Duration and stability of the business: This factor considers the nature of the closely held business and of the assets of that business, the relevant market factors that will impact the business’s future success, its recent financial history, and the experience of its management, in an effort to predict likelihood of its success and survival through the deferred payment period. This information may be found in the appraisal, financial statements, and SEC filings. Facts relevant to this factor are information regarding any outstanding liens, judgments, or pending or anticipated lawsuits or other claims against the business, if any; age of business; and continuity and stability of management. The estate may use a sworn affidavit or other probative documents to provide this information. When considering this factor, determine whether the decedent owned a majority interest in the business. If the decedent owned a minority interest, the financial information pertaining to the business may not be as relevant because the estate may not force distributions to pay the estate tax. In this case, consider whether other assets in the estate or other income are available to pay the estate tax.

    2. Ability to pay the installments of tax and interest timely: This factor considers how the estate expects to be able to make the annual payments of tax and interest as due, and the objective likelihood of realizing that expectation. Facts relevant to this factor may include the nature of the business’s significant assets and liabilities, type of debts (subordinated, related party, guaranteed, payment terms), and the business’s cash flow (both historical and anticipated). An appraisal, the business’ tax return, or SEC filings may provide this information.

    3. Compliance history: This factor addresses the business’s, estate’s and decedent’s history regarding compliance with all federal tax payment and tax filing requirements, in an effort to determine whether the business, its management and the executor respect and comply with all tax requirements on a regular basis. The relevance of the closely held business’s filing and payment compliance is proportional to the estate’s ownership interest and control of the business. This factor also addresses the estate’s compliance history with respect to federal tax payment and filing requirements. Review frequency of requests for extension of time to pay, amount, and ultimate payment.

  8. Advisory shall fully document in the case file history:

    1. The factors and information considered in making the determination.

    2. A brief history outlining taxpayer’s response to request for bond or lien, and;

    3. A detailed explanation regarding why a bond or a lien was required in this case in order to protect the Government’s interest, and the amount of bond or lien required.

  9. After Advisory has made its determination, Advisory will send the estate Letter 4283, Notification Regarding Internal Revenue Code Section 6166 Security Requirement. When preparing the letter, select the optional paragraph (1) to notify the estate that no bond is required; optional paragraph (2) to notify the estate that a bond is required after reviewing the information provided by the estate; or optional paragraph (3) to notify the estate that a bond is required when the estate did not provide the requested information within 30 days. If option (2) or (3) is selected, include the IRC § 6324A Lien Agreement, Form 13925, and Form 8821. If the estate provides a lien form other than Form 13925, Advisory will consult Area Counsel for the state of the decedent’s domicile for approval of the lien form. If the designated agent on the Form 13295 or lien agreement is someone other than the executor, ensure Form 8821 is received. Fax a copy of the lien agreement and Form 8821, if applicable, to E&G Campus to associate with the file.

  10. Maintain a copy of the Letter 4283 in the case file and schedule a follow up date in ICS.

  11. In the case of any proposed bond, Advisory will consult with Area Counsel for drafting and review of the bond agreement.

  12. Area Counsel will also be consulted when unusual assets are pledged on the lien agreement, such as art or collectibles.

  13. The Letter 4283 allows 30 days from the date of the letter to negotiate the bond or lien property. If the estate refuses to provide a bond or lien after Advisory sends Letter 4283 notifying the estate that a bond or lien is required, the Advisor will send the case to the Advisory Group Manager for preparation, selection of the appropriate optional paragraph, and issuance of a Letter 950-I, Preliminary Internal Revenue Code § 6166 Determination Letter. The Letter 950-I is the letter that notifies the estate of its right to appeal the preliminary determination. If the estate does not appeal within the time period, the IRC § 6166 election terminates. Send Letter 950-I by certified mail and maintain one copy in the case file, notating the date it is sent, also schedule a follow up date in ICS.

  14. If the decedent died before August 6, 1997, the estate should not be sent the 950-I letter because the estate does not have the right to appeal or go to Tax Court. Provide a narrative to the E&G Campus stating the reason for proposed termination and request the Letter 6335-F be sent.

  15. Advisory will send a copy of the Letter 950-I to E&G Campus to associate with the file.

  16. After the Letter 950-I is issued, the case will be controlled and monitored for expiration of the 30-day period by the Advisory Group Manager.

  17. If within the 30 day period allowed in Letter 950-I the estate requests an extension of time to request Appeals consideration, the Advisory Group Manager may grant an extension for up to 30 days. In unusual cases if circumstances warrant, the Advisory Group Manager may grant an additional extension of time. Such approval and the reason for granting the additional extension must be documented in the case history.

  18. If the estate does not appeal the preliminary determination within the 30-day period allowed in Letter 950-I, or as extended, or if the estate sends an untimely post-marked protest, Advisory shall terminate the election 15 days (to allow for mail time) after the expiration of the 30-day period or the extended period. Advisory must send to the E&G Campus a narrative indicating that the time for appeal has expired and that the account should be accelerated. Advisory shall instruct E&G Campus to send Letter 6335-F, Notice of IRC 6166 Denial or Termination, to the estate, certified mail, return receipt requested. E&G Campus will compute interest on the Letter 6335-F, 30 days from the date of the Letter 950-I, and will prepare the Letter 6335-F showing the total balance on the account and all additional interest.

  19. If the estate requests Appeals consideration, Advisory will date stamp the protest and document in the case file history that the protest was received and forward the protest letter and the following to Appeals 30 days from the postmark date of the protest letter:

    1. Letter 4283

    2. Documentation considered in analyzing whether the bond or lien was required

    3. Letter 950-I

    4. Case file history, and

    5. Any pertinent correspondence with the Taxpayer.

  20. If the estate submits a protest containing new IRC § 6166 related issues with its request for Appeals consideration, Advisory will determine the validity of the new issue. If Advisory disagrees with the estate on the new issue, it shall prepare a response to the protest which includes the determination reached on the new issue. Advisory shall send the response to the protest to the estate and include it in the package to be transmitted to Appeals.

  21. Prepare Form 3210 forwarding case to Appeals notating "Type of Case IRC § 6166 – Termination Case, Lien Determination – This is an emerging issue." . Advisory will route their protest cases based on the state in which the decedent was last domiciled using the case routing spreadsheet tool available under the Case Routing tab on the Appeal’s website, http://appeals.web.irs.gov/APS/bystate2.htm, with the understanding the case may be transferred to another Appeals Officer based on inventory needs. Notify E&G Campus by secure e-mail that a protest has been forwarded to Appeals so that the Letter 6335-F is not sent prematurely.

  22. If no new issues are raised by the estate in its request for Appeals consideration, Advisory will not prepare a response to the protest. Appeals will consider the documentation in the case file history containing all prior analysis.

  23. The Appeals Office will send the case file with the Appeals Case Memorandum (ACM) to Advisory once a decision is final, so that Advisory can proceed. Advisory will notify E&G Campus if the election under IRC § 6166 is terminated, and shall instruct E&G Campus to send Letter 6335-F certified mail, return receipt requested. If Appeals allows the election to continue, notify E&G Campus that Appeals has determined the estate is entitled to the election. If no response is received, Advisory will follow-up with Appeals in 90 days. Advisory may contact the Appeals Customer Service to locate cases or update status, for contacts seehttps://organization.ds.irsnet.gov/sites/AppealsCOS/APS/SitePages/CaseRouting.aspx.

Miscellaneous Documentation From Campus or Appeals

  1. Advisory will receive documentation from E&G Campus concerning IRC § 6166 payments or installment payments that have not been paid. E&G Campus is sending this information to be associated with the case file. E&G Campus will forward for informational purposes copies of billings and/or protest letters that are sent to Appeals. OIs will be maintained in ICS on accounts where informational documents are sent to Advisory from the E&G Campus.

  2. This information should be used in considering creditworthiness of estate, necessity for a bond or lien, and/or necessary enforcement action.

  3. Advisory may receive a courtesy investigation from the E&G Campus to collect non-deferred tax, penalties and interest. The following actions should be taken:

    1. Contact the estate representative and demand payment of the non-deferred tax. Provide a deadline for payment and document the ICS history.

    2. If payment is not made send final demand letter (Letter 1058) for only the non-deferred portion of tax due plus penalties and interest. E&G Campus will send letters addressing late installment payments on deferred tax.

    3. After expiration of the 30 day final demand letter the advisor will issue a courtesy investigation to initiate enforced collection (such as levy or suit referral) as necessary against assets or initiate such action themselves, as appropriate. The Advisor will coordinate collection action with the revenue officer involved.

    4. If full payment is still not made, the IRC § 6321 lien should be recorded by the field revenue officer to attach to the remaining undistributed probate property for the non-deferred portion of the estate tax due. Guidance for styling of notices and liens is in IRM 5.5.3.7, Styling and Mailing of Notices. Document the ICS history concerning your action to protect the Government’s interest. Revenue Officers must comply with collection due process rights in IRM 5.1.9, Collection Appeal Rights when utilizing the IRC § 6321 lien.

    5. If estate is unable to pay the non-deferred tax this is an indicator/factor that the estate may be financially unstable. At this time the advisor will conduct an evaluation of the current assets, review time remaining on the IRC § 6324(a) lien (or any other lien in effect such as the IRC § 6324A lien) and determine if the Government is adequately secured for the remaining tax due during the duration of the deferral period.

    6. If the advisor determines the Government is not adequately secured for the remaining portion of deferred estate tax, Letter 4283 will be sent to the executor/designated agent. Follow procedures in IRM 5.5.8.5.1

    7. If estate still does not pay non-deferred portion of tax and refuses to provide a lien or bond on the IRC § 6166 portion, issue Letter 950-I and proceed with acceleration of the deferred portion of tax.

    8. Revenue Officers may continue collection actions on the non-deferred portion of estate tax while the deferred portion is being accelerated.

  4. Advisory will also receive documentation (copies of Letter 6335 or 6335(T)) from the E&G Campus when estates are delinquent in paying installments timely, Advisory should review the account to determine if a lien or bond has been secured. If a lien or bond has not been secured a re-evaluation of collection risk is appropriate action to ensure the Government is adequately protected. This information and advisor actions must be documented in the ICS history because a pattern of delinquency is a factor in determining credit risk.

  5. Advisory will receive from the E&G Campus documentation (copies of Letter 6335(F)) indicating installment payments have not been made and the acceleration of the tax due is in process. Advisory must upon receipt review the account and determine if a lien or bond has been secured. Advisory shall review, recommend and document the ICS history regarding the most appropriate collection action based on information in their lien file. This information will be used when the account is assigned to Field Collection for their initial analysis of collection avenues. Considerations to be addressed:

    1. What assets remain that are encumbered by the IRC § 6324(a) lien? When does it expire?

    2. What equity is there in estate assets?

    3. Are there specific assets pledged on the IRC § 6324A lien?

    4. Does a seizure or levy need to be done on pledged assets?

    5. Did Advisory request filing of the IRC § 6321 lien?

    6. Is there a bond?

    7. Should a suit referral be completed?

  6. Advisory will maintain lien case files according to retention guidance in IRM 5.5.8.19 and shall provide lien case files to Field Collection when requested to facilitate collection of the account. Lien case files should not be destroyed on accounts that reflect a balance due.

  7. Advisory will receive from the E&G Campus documentation indicating the case is in litigation contesting the termination of the election.

  8. If the election is terminated and the taxpayer files a section 7479 declaratory judgment case after the IRS proposes termination of a section 6166 election, the election would not be terminated until the declaratory judgment is final. Therefore, the CSED would be suspended until that time.

  9. When E&G Campus closes their IRC 6166 case file documents will be associated with the Form 706.

  10. When Appeals makes a determination that an estate may continue to elect an IRC § 6166 installment election, the entire case file, including the original return shall be sent to Advisory to copy information necessary for bond or lien determination. This file should be copied within 30 days, and the return should be sent to E&G Campus to complete the installment account set-up.

  11. Advisory will be responsible to set follow-ups through ICS to check status of cases that were sent to Appeals for resolution either by utilizing the Appeals Account Specialist or contacting the E&G Campus to determine if they have received the Appeals Case Memorandum (ACM) from Appeals.

Monitoring Accounts During The Deferral Period

  1. Informational documents received from the E&G Campus should be reviewed within 30 days of receipt. The advisor’s evaluation of impact or harm to the Government’s interest should be documented in the ICS history. This documentation may dictate frequency of monitoring an account.

  2. Notice of late installment payments, preliminary IRC § 6166 election terminations or extensions to pay on IRC § 6166 installment payments (see IRM 5.5.5.5) should be considered as a factor in lien determination and monitoring. Accounts should be re-evaluated if any of the above actions occur.

  3. Encumbrances must be checked to determine adequacy of collateral. The advisor may use sources such as Accurint, Secretary of State, UCC filings, etc. to verify encumbrances.

  4. All IRC § 6166 accounts will be re-evaluated six years into the deferral period. Schedule a follow up through the ICS system. Advisors will consider the factors described in IRM 5.5.8.5.1 and should also look at subsequent actions below to determine if additional action should be taken to protect the Government’s interest:

    1. What assets have been distributed?

    2. Has the estate distributed, sold, exchanged, or otherwise disposed of 50 percent or more of the value of the estate’s interest in the closely held business?

    3. What assets have been discharged or subordinated?

    4. Has the estate made installment payments timely and in the full amount due?

    5. Has the estate requested extensions to pay installments?

    6. Has the estate defaulted on other financing?

    7. Has the estate made additional payments toward the tax liability?

    8. Does the closely held business appear to be financially stable and able to make future installment payments?

    9. Is the estate in compliance with filing and paying requirements?

  5. Annual monitoring, considering the above factors should be conducted as the Service nears expiration of the IRC § 6324(a) lien. Each year that Advisory conducts a review, the Advisor must document their analysis and recommendations to adequately protect the Government’s interest. As the Service gets closer to expiration of the IRC § 6324(a) lien, the advisor must consider securing a "replacement lien" (IRC § 6324A lien or bond) to cover the additional deferral period and the amount of deferred tax due in order to protect the Government’s interest.

  6. Advisory must be aware that if a determination is made that the Government is at risk of not collecting the remaining tax due, appropriate action (for example, a bond or lien or enforced collection action) must be taken and completed prior to expiration of the IRC § 6324(a) lien. Consideration must be given to allow time for the executor to exhaust any allowable appeals and potential litigation time if the estate petitions the Tax Court under IRC § 7479. If the account is accelerated, this process generally requires a minimum of six months to be completed. Timeframes of acceleration, appeals and litigation must be considered in order to complete collection actions prior to expiration of the IRC § 6324(a) lien.

  7. If the advisor determines that a lien is required the advisor will send the executor Letter 4283. Follow procedures in IRM 5.5.8.5.1

  8. In consideration of accounts where the estate has been in compliance with timely payment of installments, as the Service gets closer to expiration of the IRC § 6324(a) lien, the advisor must consider securing a "replacement lien" (IRC § 6324A lien or bond) to cover the additional deferral period and the amount of deferred tax due in order to protect the Government’s interest.

  9. Advisory must ensure annually that the value of the collateral securing the lien is equal to the outstanding IRC § 6166 balance on the account. In accordance with the Form 13925, the designated agent is required to send current valuation information annually with respect to the pledged property listed in the agreement. If the executor has provided an IRC § 6324A lien, Advisory must review the annual valuation information report from the designated agent to confirm that the value of the collateral securing the lien is equal to the outstanding IRC § 6166 balance on the account. If the financial information is not received from the designated agent, the Advisor may contact the designated agent to request that information.

  10. Advisory will use Letter 4345,Collateral Valuation, to request current valuation information with respect to property pledged on the lien agreement.

  11. Advisory will use Letter 4346,Additional Collateral, as notice and demand for additional collateral to secure the special lien.

Processing of Lien Form 668-J and Form 668-K

  1. Follow the procedures found at IRM 5.5.8.4.1 for filing of estate tax liens.

  2. When preparing estate tax liens, the SSN of the decedent and any qualified heirs whose names are shown on the lien will be redacted using the format XXX-XX-1234. For EINs redact all but the last four digits XX-XXX1234.

  3. Actual lien fees will be manually posted by CLO FORT when the lien is received back from the recording office, see IRM 5.19.12.8.2.

  4. Advisors are responsible for ensuring receipt of the recorded lien from CLO and that lien fees have been input, if applicable.

  5. Advisory will maintain an ICS case in the name of the estate for which the Form 668-J was recorded until such time as the lien is released. Advisory will also maintain a file of retained lien copies and associated documentation, see IRM 5.5.8.19 for records retention guidance.

  6. The Campus Estate & Gift Tax Department, will, upon receipt of full payment of the liability secured by Form 668-J, coordinate with the Advisory Estate Tax Group to ensure that the Form 668-J lien is released in a timely manner. Campus will notify the Advisory, Estate Tax Group within 10 working days after receiving notification of payment, through secure e-mail, to release any Form 668-J that may have been recorded.

  7. Advisory will use Form 668-K, Certificate of Release of Federal Estate Tax Lien Under Internal Revenue Section 6324A, to release the Form 668-J lien.

  8. Form 668-J and Form 668-K must be prepared manually. However, a PDF version of the form is available on the intranet at http://publish.no.irs.gov/catlg.html.

  9. If the estate representative chooses to post a bond rather than consent to the filing of a lien, follow the procedures for processing bonds found at IRM 5.6.1.3.1, Bonds and IRM 5.6.1.3.3, Estate Tax Bonds and Other Collateral. Additional information on bonds, such as approved sureties, may be found at https://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/surety_home.htm.

  10. The Service cannot accept a Letter of Credit in lieu of a bond when a decedent’s estate elects to pay the tax in installments under IRC 6166.

  11. In the case of any proposed bond, Advisory will consult with Area Counsel for review of the bond.

  12. If stock certificates are pledged as collateral, the advisor will secure the actual stock certificate. This would prevent the sale of such certificates to third parties.

  13. Prepare Form 2276, Collateral Deposit Record classifying the stock certificates as ″safekeeping″ and reflecting a zero value for revenue accounting system (RACS) purposes. The certificates must be stored in an approved safe. Follow procedures in IRM 5.6.1.8, Preparing Form 2276, Collateral Deposit Record.

  14. Stock, in most instances, will be considered personal property by most state law. With respect to personal property, a lien must be filed in the office designated by state law in which the property subject to the lien is situated.

Requesting Payoffs for Lien Form 668-J

  1. Payoff requests for IRC 6166 accounts will still be sent to E&G Campus via SECURE e-mail to:

    • Inbox address: *SBSE Estate & Gift 6166

    • Subject Line: 6166 PAYOFF REQUEST

  2. The penalty and interest computation sheet will be scanned/saved and returned with the response to the advisor. Advisors need to document the ICS case history of the amount, print the calculation sheet and add it to their casefile or paste e-mail into ICS history. Should a later payoff be needed or the account is transferred the advisor will be able to forward the calculation sheet so the E&G Campus can update the previous calculation provided.

  3. Requests should be processed within 14 calendar days of receipt to allow adequate time for turnaround. Provide contact information should someone need to call you or reply to inform you of a delay in processing the request.

  4. If there is a need for a quicker response mark the subject line as EXPEDITE, when the payoff is needed and the date of payoff.

  5. For payoff requests on extension to pay accounts that were previously in status 14, please send your payoff requests on IRC § 6161 accounts only to CCP FORT. This guidance is in reference only to accounts that were previously in status 14 for manual monitoring, once an account goes into status 14 you can no longer get a payoff through IDRS. If the account did not go into status 14, INTST can be utilized to provide a payoff.

Processing Requests for Release, Discharge of Property From, or Subordination of IRC § 6324A Form 668-J

  1. Requests for release of Form 668-J, and discharge and subordination applications will be processed by Advisory.

  2. Releases- The criteria under IRC § 6325(a) for issuance of a certificate of lien release - liability satisfied or unenforceable or bond accepted - are applicable to Form 668-J. Follow the procedures found at IRM 5.5.8.4.2 for processing estate tax lien releases.

  3. Discharge - Requests for discharge will normally be made under IRC § 6325(c). Provided property equal to the amount of the remaining deferred balance of tax and interest will remain subject to the lien, a certificate may be issued discharging a portion of the property listed on Form 668-J from the lien. As an alternative, under IRC § 6324A(d)(5), the estate representatives may substitute other property in order to obtain a discharge of all or part of the property listed on the lien. If the disposition of property will result in accelerated payment of all or part of the deferred tax, or if the equity in the remaining property will not equal the remaining deferred balance of tax and interest, the application should be made under IRC § 6325(b)(2).

  4. Subordination - Requests for subordination will normally be made under IRC § 6325(d)(2). Provided it is determined that the amount realizable by the United States from the property will ultimately be increased, or that the ultimate collection of the tax liability will be facilitated by the subordination, a certificate may be issued.

Gift Tax Lien Under IRC § 6324(b)

  1. The provisions of the gift tax lien are also delineated in IRC § 6324 and parallel those for the general estate tax lien.

  2. The special gift tax lien imposed by IRC § 6324(b) attaches to all gifts made during the calendar year for the amount of the gift tax imposed upon the gifts made during such year. If the gift tax is not paid by the donor when due, the donee of any gift becomes personally liable for the tax to the extent of the value of the gift. The gift tax lien extends for a period of ten years from the time the gifts were made or until or the tax is paid, whichever date is sooner.

  3. Guidance on gift tax liens is provided in IRM 5.5.9.9, The Gift Tax Lien.

  4. Advisory is responsible for processing Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship, for Form 709 gift tax returns. Guidance is provided in IRM 5.5.5.9, Extension Requests to Pay Gift Tax.

Discharge Requests Involving Decedent Cases

  1. Advisory may receive a discharge request for property owned by a deceased taxpayer. The responsibility to process such requests depends on what taxes are owed and/or what returns are required to be filed.

    If... Then the request is reviewed by...
    There is Form 706 or Form 709 tax liability or filing requirement Advisory Estate Tax Lien Group
    Only Form 1040, TFRP, Form 941 for business taxes, etc. are owed by a decedent Advisory Group
  2. To determine if there is an estate or gift tax filing requirement, research IDRS using the taxpayer’s SSN with a “V” or “W” suffix (e.g., 123-45-6789V, 123-45-6789W). IDRS will show if there is a balance due account or if an extension of time to file and/or pay has been submitted (TC 460 or TC 468). Extensions are requested using one of the following forms:

    1. Estate taxes - Form 4768,Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes

    2. Gift taxes - Form 8892, Application for Automatic Extension of Time To File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax is provided

  3. For discharge requests related to a decedent’s tax liabilities, determine when the statutory lien arose, when the NFTL was filed, and what the status of the property was when the NFTL was filed.

    1. If the assessment was made before the death of the taxpayer, the federal tax lien attaches to the property owned by the taxpayer and follows that property into the estate or the hands of the transferee. The Government’s priority position is determined based on the filing date of the NFTL

    2. If the assessment was made after the death of the taxpayer, the federal tax lien attaches to any probate property in the estate at the time of assessment.

    Note:

    See IRM 5.5.3.6, Notice of Federal Tax Lien, and IRM 5.17.13.9.1, Administrative Collection, for detailed information about liens on decedent property.

  4. A discharge request related to a decedent’s tax liabilities that is subject to the federal tax lien should be processed following standard discharge procedures.

  5. Expenses related to the decedent's tax liabilities are known as "administrative expenses." When determining allowance for administrative expenses consider the factors outlined in IRM 5.5.2.6.1.1, Necessary Administrative Expenses.

Responsibilities for Processing Requests for Release, Discharge of Property From, or Subordination of Estate Tax Liens

  1. Advisory is responsible for processing all requests for discharge for any of the estate tax liens and all applications for subordination under IRC § 6325(d).

  2. Advisory Estate Tax Lien group will be required to:

    • Investigate applications for discharge of any estate tax lien. Applications for discharge under IRC § 6325(c) are usually submitted on Form 4422, Application for Certificate Discharging Property Subject to Estate Tax Lien

    • Review and finalize details concerning the acceptance of an escrow agreement Form 15056, Escrow Agreement for Estates

    • Verify funds have been deposited with escrow agent

    • Ensure all payments are applied to the correct account

    • Issue a discharge certificate Form 792,United States Certificate Discharging Property Subject to Estate Tax Lien, is used to discharge property under IRC § 6325(c)

    • Ensure collateral controls are established on Interim Revenue Accounting and Control System (IRACS)

    • Monitor the escrow agreement

    • Close IRACS controls when funds have been delivered in accordance with terms of the escrow agreement.

  3. Guidance for opening of controls, investigation, response times and processing of discharge requests in IRM 5.12.10, Lien Related Certificates, should be followed.

  4. The guidance provided in this IRM is in addition to IRM 5.12.10, focusing on unique circumstances that arise in processing requests for discharge of property from the estate tax lien.

Considerations Regarding Estate Tax Lien Discharge Applications

  1. The issuance of the certificate of discharge is discretionary and should be issued only if there is an actual need. The Service’s authority to issue a certificate of discharge related to the estate tax lien is governed by IRC § 6325(c) and the related regulations. Pursuant to the regulations, the primary purpose of the estate tax lien discharge is not to evidence payment or satisfaction of the estate tax, but to permit the transfer of property free from the lien in case it is necessary to clear title. The estate tax will be considered fully satisfied only when an investigation has been completed and payment of the tax, including any deficiency that has been determined, has been made.

  2. In many instances, in determining whether to grant an estate tax lien discharge, the issue you will need to consider is whether the estate tax liability is adequately provided for, meaning that the Government’s interest in collecting the estate tax is secured under IRC § 6325(c) and the accompanying Treasury Regulations. In determining whether an estate tax liability is adequately provided for, you have discretion and should exercise your judgment in making that decision based upon the facts and circumstances of the case and/or in coordinating with E&G Exam. You may also consider the criteria in IRC § 6325(b) as a guideline in making your decision as the estate tax liability will generally be adequately provided for when one or more of the IRC § 6325(b) criteria set forth below is satisfied. In addition, there may be other circumstances where you and your manager determine that the estate tax liability has been adequately provided for under the particular circumstance involved. For example, while filing compliance is sometimes required when considering a lien discharge under IRC § 6325(b), a filed return is not required when considering a discharge application under IRC § 6325(c). The issue under IRC § 6325(c) is not whether the return has been filed, but whether in your judgment and discretion the estate tax liability is adequately provided for under the circumstances. Depending upon the circumstances, if the Form 706 has not been filed or a closing letter has not been issued, it may be desirable to coordinate with E&G Exam, before making your lien discharge decision under IRC § 6325(c). In all cases under IRC § 6325(c), the estate must be divested of its entire interest in the property to be discharged.

  3. Pursuant to Treasury Regulation § 301.6325-1(c)(1), the issuance of the certificate of discharge is a matter resting within the discretion of the appropriate IRS official. In many instances, decisions concerning the discharge application can be made from the information provided on the Form 706 (if applicable) and the Form 4422 without the need to coordinate with E&G Exam. For example, if based on the information provided with the Form 4422 and internal account records you are able to determine that the estate tax liability has been paid, or the estate is not subject to a Form 706 filing requirement, or the value of other property disclosed on the Form 4422 that will remain subject to the estate tax lien is more than ample to protect the Government’s interest in the payment of the estate tax, coordination with E&G Exam is not ordinarily necessary. In other instances, you and your manager may decide that it is necessary to coordinate with E&G Exam; for example, to estimate the amount of the estate tax liability or to determine the status of an examination. You should also coordinate with the Office of Chief Counsel when a deficiency has been proposed and is or may be the subject of litigation before making a decision on the discharge application. In all cases, decisions concerning lien discharge applications should be made as expeditiously as possible while, in your and your manager’s judgment, protecting the Government’s interest in collecting the estate tax liability.

    • Property Double the Amount of the Liability, IRC § 6325(b)(1) - A certificate of discharge may be issued if it is determined that the remaining property of the estate subject to the estate tax lien has a fair market value that is at least double the amount of the unsatisfied liability secured by the estate tax lien and the amount of all other liens upon such property which have priority over the estate tax lien. It should frequently be possible to determine the value of the property from Form 4422 and you should refer to the form for that purpose. For example, if the estimate of the estate tax liability on the Form 4422 is $500,000 and the fair market value (minus encumbrances) of the remaining property is $6,000,000, then a lien discharge would ordinarily be appropriate. See IRM 5.12.10.3.1 for additional guidance.

    • Part Payment, IRC § 6325(b)(2)(A)- A certificate of discharge may be issued for any part of the property subject to the estate tax lien if it is determined by the Service that an adequate amount has been paid in partial satisfaction of the estate tax liability secured by the lien. The amount cannot be less than the value of the Service’s interest in the property to be discharged. Consider all facts and circumstances of the case when determining the amount to be paid, including all other liens and encumbrances with priority over the estate tax lien. Reasonable and necessary expenses, including fees and taxes that are treated as expenses of sale, are also allowed in calculating the amount necessary for discharge of the property from the lien. See IRM 5.12.10.7.4. Payments are applied directly to the account. See IRM 5.12.10.3.2 for additional guidance.

    • No Value, IRC § 6325(b)(2)(B)- A certificate of discharge may be issued if it is determined that the interest of the Service in the property subject to the estate tax lien has no value. Consider all facts and circumstances of the case when determining the value of the Government’s interest in the property, including all other liens and encumbrances with priority over the federal tax lien. See IRM 5.12.10.3.3 for additional guidance.

    • Substitution of Proceeds of Sale (Escrow Agreement), IRC § 6325(b)(3) - A certificate of discharge may be issued if property subject to the estate tax lien is sold and the Service determines that the proceeds of sale should be held in escrow as a fund subject to the estate tax lien in the same manner and with the same priority as the estate tax lien had with respect to the discharged property. Whether to require an escrow and the amount of the escrow is a decision within the discretion of the IRS, and should be based on the facts and circumstances of each case. In this situation, escrow agreements are used to evidence that the proceeds of sale remain subject to the estate tax lien. Reasonable and necessary expenses incurred in connection with the sale of the property or administration of the sale proceeds will be paid from the proceeds of the sale before the satisfaction of any claims. See IRM 5.12.10.7.4. Form 15056, Escrow Agreements for Estates, will be utilized. Funds are held in escrow until the tax liability can be determined. The IRS has discretion to allow distributions from escrow for allowable expenses of administering the estate before the tax liability is determined. See IRM 5.5.2.6, Administrative Expenses, and related sections regarding necessary and reasonable expenses. Any excess proceeds will be released if it is later determined that the estate tax liability is adequately provided for or after verification that all assessments (tax, interest and penalty) have been made and funds have been properly applied to the account. See IRM 5.12.10.3.4 for additional guidance.

    • Right of Substitution of Value, IRC § 6325(b)(4) - An owner has the right under IRC § 6325(b)(4) to receive a certificate of discharge on any property subject to an estate tax lien if the owner deposits an amount equal to the value of the Service’s interest in the property, as determined by the Service, or furnishes an acceptable bond in a like amount sufficient to cover the Service’s determined interest in the property. See IRM 5.12.10.3.5 for additional guidance.

Coordination Required Between Estate and Gift Exam and Advisory

  1. Advisory can make a referral to E&G Exam through the Specialist Referral System (SRS) when no return has been filed and no closing letter has been issued for assistance in determining if there is a filing requirement or if there are potential audit issues that may result in a proposed deficiency. The SRS automates the referral request process to E&G Exam, the portal can be found at https://srs.web.irs.gov/. The SRS system must be used for referrals, questions, and requests for assistance. See E&G Exam guidance IRM 4.25.14.2.4.

  2. E&G Exam will provide written communication of their recommendations on issues such as filing requirements; potential audit issues or proper calculations of recapture tax returns within 10 business days. The advisor should explain, if necessary, to the taxpayer that Exam has 10 business days to reply to request for assistance in establishing the potential tax liability.

  3. If Advisory receives a lien discharge request from an estate where the estate tax return has been selected for examination, options for protecting the Government’s interest are similar to instructions for scenarios when no return has been filed and/or the final tax liability is unknown.

  4. Consult with the Estate Tax Attorney working the case to secure the Revenue Agent Report (RAR) when the audit is final and take any necessary actions to close escrow agreements.

Documents To Facilitate Processing of the Application

  1. In addition to the completed Form 4422, the estate administrator should submit the following:

    • Short form of letters testamentary

    • Copy of will

    • Copy of sale contract with a legal description of the property being sold

    • The proposed itemized closing statement outlining sales expenses and creditors to be paid

    • Copy of the Form 706

    • If return is not filed a draft of Form 706, and/or a copy of the inventory and appraisement reflecting all assets of the estate

    • Form 4768, Application for Extension of Time to File a return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes.

  2. It may be necessary to review additional documentation such as:

    • An appraisal by a disinterested third party

    • Title report

    • Any recorded deeds/instruments to indicate how the property is titled or when the creditor recorded its lien

    • The company name, phone number, and address for the title or escrow company that will be used at the settlement and Form 15056, Escrow Agreement for Estates

    • Form 8821, Tax Information Authorization, giving the Internal Revenue Service the authority to contact individuals or companies, if necessary, when determining if the discharge is appropriate.

  3. Evaluate the priority of all liens, judgments and expenses to determine the interests of the Government in the property.

  4. The ICS Advisory case file should reflect all actions taken and deadlines established. Guidance for documenting discharge case files is outlined in IRM 5.12.10.17, Requirements for Lien-Related Certificates.

  5. If documents requested are not submitted timely refer to IRM 5.12.10.7.2, Requests for Additional Information - Actions if Not Received.

  6. If documentation and/or payment are received after the ICS NFOI has been closed, create a new ICS NFOI to complete the investigation and make an appropriate recommendation.

Evaluating Applications for Discharge under IRC § 6325(c)

  1. When investigating requests for discharge review the Forms 4422, documents submitted by the estate, internal and external records (such as market comparisons) to estimate or substantiate the tax liability in order to determine how much or if any of the sale proceeds must be held or paid over to the Government in exchange for a certificate of discharge. It may be necessary to request assistance from E&G Exam using the Specialist Referral System (SRS) to estimate the estate tax liability, to provide input on the effect of any deductions on the tax computation or when sales occur on properties that are claimed under special elections.

  2. Consider the factors below to determine how much or if any of the sale proceeds must be held or paid over to the Government in exchange for a certificate of discharge:

    1. Conduct a compliance check to see if the estate has related outstanding periods, for returns such as Form 1040, Form 1041 or Form 709. Look at BMFOLT to see if there are unfiled or balance due returns. Ensure all payments are applied to the correct account.

    2. If Advisory or E&G Exam determines that the estate was not required to file an estate tax return, then do not issue a discharge certificate. Instead, issue Letter 1352, Request for Discharge of Estate Tax Lien, selecting the applicable paragraph for no estate tax return filing requirement.

    3. If the Form 4422 indicates that the estate tax return will be non-taxable, based upon the estimated gross estate and estimated deductions, then a discharge without an escrow may be appropriate. However, if you have a question regarding the effect of any of the deductions on the tax computation, you should submit an SRS referral to E&G Exam before making a decision on the application. Number Cruncher software may be used to estimate the tax liability.

    4. If the estate reports marital and/or charitable deduction on Form 4422 additional documents should be obtained for review including the will and/or trust that authorize those deductions. Check IDRS to see if there is a surviving spouse and if warranted consult with E&G Exam on whether the estate tax liability will be reduced or no tax will be imposed, as a result if any marital and/or charitable deduction being taken.

    5. If the Form 4422 shows an estimated estate tax greater than the net proceeds from the property being sold, and no estimated payment has been made, then the net proceeds should be paid or escrowed before granting the discharge. For example, if the net proceeds are $1 million and the estate tax is $2 million, the escrow or payment would be $1 million. An SRS referral to E&G Exam may not be necessary in this situation.

    6. Research if the estate has submitted Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, and pre-paid any portion of the estimated tax due for the tax return.

    7. If the Form 4422 shows an estimated estate tax liability, and the estate has filed an extension to file the tax estate tax return (Form 4768) and paid the full estimated tax liability, then a discharge without an escrow may be appropriate. For example, if the extension request estimates $1 million in taxes and the $1 million was paid with the extension, you may determine that an escrow or additional payment is unnecessary. However, if you have a question regarding the effect of deductions on the estate tax liability computation, you should submit an SRS referral to E&G Exam before making a decision on the application.

    8. Does IDRS reflect there is a balance due on the account? If yes sales proceeds should be applied directly to the account.

    9. Check Form 706 page 2 to see if there is a special election reported on the return under IRC § 6166 or 2032A. Is the property being sold considered the qualifying property for the election? Will sale of this property disqualify the estate for the special election? Under such circumstances disqualification may result in additional tax due, send an SRS referral to Exam for assistance with questions. Has the special election lien been secured? Coordinate with Campus E&G unit, if the election is disqualified or there is impact to billing.

    10. For estates with an IRC 6166 election - provided property equal to the amount of the remaining deferred balance of tax and interest will remain subject to the lien, a certificate may be issued discharging a portion of the property listed on Form 668-J from the lien. As an alternative, under IRC § 6324A(d)(5), the estate representatives may substitute other property in order to obtain a discharge of all or part of the property listed on the lien. If the disposition of property will result in accelerated payment of all or part of the deferred tax, or if the equity in the remaining property will not equal the remaining deferred balance of tax and interest, the application should be made under IRC § 6325(b)(2).

    11. Consider the other assets reported on the Form 4422 or Form 706 that the estate tax lien attaches that have liquidity and are sufficient in value in the event there is additional tax liability.

    12. How many properties have been sold and what assets remain in the estate in which the estate tax lien attaches. For example: the estate has sold four properties there is only one remaining piece of real property according to Form 4422. It will be necessary to determine using Number Cruncher software or with assistance from Exam to derive an estimated liability to ensure that all assets are not released before the return is filed. In this scenario it may be necessary to require additional documentation from the estate to substantiate the estimated liability or deductions reflected on the Form 4422. Review to determine if additional sales proceeds need to be held in escrow.

    13. Check Form 706 schedules to see if sales price is higher than the fair market value at date of death or alternative valuation date. If so consider an SRS referral to Exam, include a copy of the sales contract, Form 706 and inquire if there is a potential valuation issue that may increase the tax liability. For example, the return reports the property’s value as $1 million, but the property is selling for $3 million, you should submit an SRS referral to E&G Exam before making a decision on the application. E&G Exam could provide an opinion on the appropriate returned value and the impact on the estate tax liability computation or where there are questions regarding the effect of any deduction(s) on the estate tax liability computation.

    14. Consider if the examination case has been sent to Appeals or is in litigation — in this scenario the proposed tax liability has been established — sale proceeds should be secured to resolve as much of the proposed liability as possible.

    15. Look at IDRS for a TC 420 posted on the account, check AMDISA to see if the return is assigned to an Exam group for audit. If yes check with the examiner to see if there are any proposed changes to the tax liability when determining the amount of sale proceeds to secure in exchange for the discharge or request feedback on audit status.

    16. If an amended return has been filed to reduce the tax liability, until a determination on an amended is made by Exam, the original tax is still due.

Requests for Discharge of the Unrecorded IRC § 6324(a) Lien

  1. Advisory may receive requests for release of the unrecorded estate tax lien. However, just as there is no provision for filing a notice of the unrecorded estate tax lien, there is no provision for filing a release. Applicants should be instructed to provide documentation to potential purchasers of the decedent's property that either there was no Form 706 filing requirement, or, if Form 706 was filed and a closing letter has been provided to the estate by E&G Exam, a copy of the return, the Estate Tax Closing Letter 627, and verification of payment or transcript, are evidence that the IRC § 6324(a) lien has been satisfied.

  2. If an estate requests a release of the statutory IRC 6324(a) estate tax lien Advisory will issue Letter 1352,Request for Discharge of Estate Tax Lien, selecting the applicable paragraph for no estate tax return filing requirement.

Requests for Discharge in which the Estate wants all proceeds applied to the estate tax account

  1. If the estate wants all sale proceeds to be applied to the estate’s tax account in exchange for a certificate of discharge, an escrow agreement will not be necessary (see discussion regarding IRC § 6325(b)(2)(A)). Funds will be applied to the tax period as a TC 670 with designated payment code 53 for discharges.

  2. Advisory will also request and monitor for input of TC 570 on the payment posting voucher to prevent refund offset prior to posting of a tax return or completion of the audit and any subsequent assessment. The frozen status will release if a TC 150 posts. If a return is not required or audit results in no additional tax due Advisory is responsible for input of the TC 571 to release funds that should not be held.

  3. A control will be opened under code 187 miscellaneous with a “PP” indicator after the name of the estate or SSN. Quarterly follow ups must be input into ICS to see if the return has been filed and if necessary release funds timely to avoid additional interest to be paid after filing of the return or completion of the audit/assessment.

Reviewing Requests for Discharge when a Tax Return Has Not Been Filed

  1. If an estate requests a certificate of discharge yet indicates that no return is needed for the estate because the estate’s gross value is less than the amount for which a return must be filed a discharge will not be issued. Send Letter 1352 to advise the estate under these circumstances a discharge will not be issued or if additional information is required to investigate the request.

  2. If the request is for a 2010 date of death, no certificate of discharge will be issued unless a Form 706 was filed for that year.

  3. If the estate is requesting a discharge certificate early in the administration and does not have sufficient documentation to evaluate assets, consideration should be given to an escrow agreement related to the sale proceeds (see discussion regarding IRC § 6325(b)(3)). Some allowance for administrative expenses may be considered if there are no other funds or estate assets available to pay administrative expenses. When considering requests for discharge ensure the Government’s interests are protected and that the discharge will not adversely affect the Government’s ability to collect the tax. Example: The estate is selling the residence of the decedent for $400,000. The executor estimates the tax liability to be $200,000. In addition to the estate tax lien, there are junior third party liens attached to the residence. Other estate assets consist of a trust and Family Limited Partnership. Since it may be harder to determine the value or sell the estate assets that the estate does not have complete control of and the tax liability is not yet determined it may be in the Government’s best interest to use an escrow agreement to secure all proceeds from the sale of the decedent’s residence until the tax return is filed and the tax liability can be established.

  4. Conduct a compliance check to see if the estate has related outstanding periods, for returns such as Form 1040, Form 1041 or Form 709. Look at BMFOLT to see if there are unfiled or balance due returns.

Reviewing Requests for Discharge when a Tax Return Has Been Filed

  1. Employees must investigate, evaluate information and consider factors when calculating the interest of the Government in each case that a discharge request is submitted. For example some factors would be:

    • Check Form 706 schedule to see if sales price is higher than the fair market value at date of death or alternative valuation date. If so consider an SRS referral to Exam, include a copy of the sales contract, Form 706 and inquire if there is a potential valuation issue that may increase the tax liability.

    • Check Form 706 page 2 to see if any special elections are claimed return under IRC § 6166 or 2032A. Determine if the property being sold is part or all of the property that qualifies for the special election.

    • Will sale of this property disqualify the estate for the special election that results in additional tax due? Has the proper special election lien been secured?

    • Consider the other assets reported on Form 4422 that the estate tax lien attaches to in the event of additional estate liability.

    • Consider the types of assets, i.e. other real property, cash or marketable securities that have liquidity and are sufficient in value to pay any additional tax liability?

    • Consider if the examination case has been sent to Appeals or in litigation – in this scenario the proposed tax liability has been established - sale proceeds should be secured to resolve as much of the proposed liability as possible.

    • Consider if the Estate Tax Attorney report has been issued indicating additional tax liability or a decrease when determining the amount of sale proceeds to secure in exchange for the discharge or request feedback on audit status.

    • Has the estate tax liability been paid? If not sales proceeds should be applied directly to the account.

    • If an amended return has been filed to reduce the tax liability, until a determination on an amended return is made by Exam, the original tax is still due.

    • If a TC 421 has been input on the account, release any funds above full payment of tax, penalties and interest. If there is a special election involved make sure the qualifying property has not been sold and the special election lien has been addressed.

Application for Discharge with Request for Allowance of Administrative Expenses

  1. In some requests for discharge of property from the estate tax lien that are submitted before the tax return is filed the estate administrator may request some of the sales proceeds to pay administrative expenses ahead of the estate tax lien priority.

  2. Expenses related to the decedent's estate are known as "administrative expenses". They include any expenses related to maintenance of the decedent's property incurred after the decedent's death.

  3. The estate tax lien will be divested of assets used for the payment of charges against the estate and expenses of administration which have been allowed by any court having jurisdiction over the estate. See IRC § 6324(a)(1). Review court records for such orders and consult with Counsel to address questions. However, the decision by an executor to use estate assets to pay expenses of administration does not divest those assets of the estate tax lien, unless approved by a court. See Kleine v. United States, 539 F.2d 427, 432-33 (5th Cir. 1976).

  4. The Service in its discretion may permit reasonable, necessary expenses to be paid before the federal estate tax lien. Such expenses must be examined to determine if an expense is reasonable and necessary to the administration of the estate. Reasonable and necessary expenses should not be permitted ahead of a tax lien if such expenses can be paid from other estate assets/funds or are already covered by an insurance policy, trust or other similar benefit that covers such costs. State statutes may limit the amount permitted to be paid for administrative expenses in probate. Inform the administrator that such planned expense payments may not be made prior to tax payments without prior agreement from the Service.

  5. Reasonable administrative expenses are limited to expenses for preserving and marshalling estate assets. Consideration should be given to how does allowance of this expense benefit the Government giving up its lien position.

  6. Review guidance in IRM 5.5.2.6, Administrative Expenses, and related subsections.

  7. The expenses of selling assets are allowable only if the sale is necessary to pay the decedent's debts, the expenses of administration or taxes, or to preserve the estate or carry out distribution.

  8. Employees are required to request and review documents that substantiate expenses such as itemized statements of service, invoices for payment, etc. If documentation cannot be provided, employees should not permit theses expenses to be paid ahead of a decedent's federal taxes (similar to deductions on a Form 1040 - if deductions cannot be substantiated they are not allowed). Statements should include the exact nature of the claim, the name of the creditor, and the time period covered by the claim.

  9. Determine if administrative expenses can be paid from other non-probate assets or if provisions have been made to pay estate expenses from a trust or other estate asset. Advisory will review submitted expenses and make a determination on what are reasonable and necessary expenses that will be allowed before the estate tax lien and have the balance of the funds paid to IRS or held in escrow until the tax return is filed.

  10. Review the completed application and determine if the discharge or subordination proposed by the applicant is appropriate. If there are discrepancies between what is proposed by the taxpayer and what is determined as acceptable by the Service, including the amount of the Government's interest in the transaction, contact the applicant and attempt to resolve.

  11. Issue the appropriate commitment letter, Letter 5751,Estate Tax Lien Conditional Commitment for Discharge, or Letter 5752, Estate Tax Lien Conditional Commitment - Escrow, when the application is acceptable and there is a tentative agreement with the applicant regarding the amount of the Government's interest.

Allowable Expenses

  1. Certain expenses may be treated as reasonable and necessary expenses for the financial transaction and should be considered in calculating the amount of the Government's interest. These expenses, which do not have to be present, may include, but are not limited to:

    • Fees related to the application process such as title report, appraisal, etc.

    • Fees inherent to the transaction, such as realtor commission or loan origination fee.

    • Costs associated with the administration of the proceeds.

    • Payment of transfer taxes including ad valorem taxes, "document stamp fees", "transfer stamps," and "transfer fees", if their assessment and collection is required on sales in the jurisdiction where the sale occurred/will occur (exception: some commercial sales, see IRM 5.12.10.7.4.1).

    • Recordation fees.

  2. Allowance of the expenses listed in (1) is prohibited if:

    • Monies were or will be paid to the taxpayer.

    • It is the expense of a buyer.

    • The allowance of fees and taxes are not mandated by state, county or other local law.

    • The fees are not applied to all sales of the same type; or the fees are excessive or unusual.

  3. Review the proposed itemized closing statement to determine whether any proceeds are used to pay prohibited expenses. See IRM 5.5.2.6, Administrative Expenses, for guidance on reasonable and necessary expenses. In some circumstances property may be sold to pay administrative expenses such as the preparation of the tax return, in such cases documentation should be provided to determine if it is a reasonable and necessary expense that should be allowed to get the estate in compliance with filing and paying requirements. Expenses should not be allowed for administration and/or maintenance of foreign assets.

  4. In addition review the itemized statement for:

    • Correct legal description for property being discharged

    • Verification that costs in connection with the securing of an escrow agent and other related expenses are paid directly by the estate

    • Determination of how much reasonable administrative expenses, if any, should be allowed

    • An acceptable escrow agent

    • Escrow Form 15056 (any changes must be approved by SBSE Counsel as this is a legally binding contract)

    • Amount to be deposited in escrow matches escrow agreement.

  5. Sale proceeds can only be allowed to pay any mortgage or other debt if the debt was recorded before the estate tax lien arose - at date of death. Review the recorded debt instrument and/or title report to determine if it was recorded prior to the date of death.

Securing Escrow Agreements

  1. IRC 6325(b)(3) and Pub. 783, Instructions on how to apply for a Certificate of Discharge of Property From Federal Tax Lien, provides guidance for securing escrow agreements. IRM 5.12.10.3.4, Substitution of Proceeds of Sale, also addresses escrow agreements.

  2. The estate must identify an acceptable, bonded escrow agent who will hold the sale proceeds in a federally insured commercial bank or similar institution while the estate tax return is being prepared for filing or the pending audit is completed. The agent can be a bonded title company, law firm, accounting firm, bank or brokerage firm. The agent may not be an individual unless that person is a CPA or an attorney, not representing the estate. If the agent is a CPA or attorney, he or she should not be related to the decedent or any of the decedent’s heirs. Ask the firm if they are bonded and with whom or do an internet search for references to a bonding company for the firm or ask for a copy of the bond. Finally, the agent must be located in the United States.

  3. If the estate wants to submit an escrow agreement, Advisory will mail to the estate Form 15056, Escrow Agreement for Estates, and provide a deadline to complete and return the agreement. In most cases, deadlines to provide the escrow agreement should be kept to 5 to 10 calendar days, due to the urgency to proceed with the sale by its closing date. Only the IRS approved escrow agreement form will be used. There may be unique circumstances where modifications are needed to the form. No changes can be accepted without review by SB/SE Counsel. The title company or escrow agent will be provided a conditional commitment letter by Advisory stating that the discharge certificate will only be issued after the IRS has verified the escrow funds have been deposited.

  4. Advisory must review the draft escrow agreement. The Advisory Group Manager approves the escrow agent selected by the applicant; any reasonable expenses submitted as incurred in connection with the sale of the property; the claim amounts and priorities; and the distribution timing of the fund.

  5. If there are discrepancies between what is proposed by the taxpayer and what is determined as acceptable by the Service, including the amount of the Government's interest in the transaction, contact the applicant and attempt to resolve.

  6. Issue the commitment Letter 5752, Conditional Commitment to Discharge Certain Property from Federal Estate Tax Lien, when the escrow agreement is acceptable and there is a tentative agreement with the applicant regarding the amount of the Government's interest.

  7. The agreement must be finalized and contain signatures of all parties involved including the Advisory Group Manager prior to the discharge being issued. An escrow agreement is considered a legal contract, electronic signatures cannot be used. Pen and ink signatures will be required when approving escrow agreements.

    Note:

    The escrow account must be funded before payment of any claim or lien through money paid by the applicant or from the sale proceeds.

Monitoring and Controls for Escrow Agreements

  1. Escrow agreements are considered collateral agreements per IRM 5.6.1.3.5, Escrow Arrangements, and must be controlled and monitored by Advisory. Collateral inventory is controlled through the Interim Revenue Accounting and Control System (IRACS). The advisor is responsible for sending documentation to ensure a control is established on IRACS.

  2. Advisory will open a control on ICS no later than seven (7) calendar days after receipt in the group of the collateral agreement using the action code 184 – Collateral. A control will be opened once the advisor confirms that the net sale proceeds have been deposited with the escrow agent.

  3. The inventory will be maintained in the IRACS database. Refer to IRM 5.6.1.6,Advisory Actions and IRM 5.6.1.8.2,Interim Revenue Accounting and Control System (IRACS), for procedures on establishing and monitoring controls on escrow agreements. Escrow agreements will be maintained as an open NFOI control until the account is resolved.

  4. Agreements will be screened quarterly to determine if a return has been filed and associated with any balance due accounts. Establish quarterly follow up dates in ICS to check IDRS for the status. Escrows should be released as soon as deemed necessary to prevent additional interest from being paid after tax balance is established.

  5. After the tax liability is established, Form 10492 may be provided to the escrow agent to notify the agent how much in certified funds must be paid to the IRS to satisfy the Government’s interest in the escrowed funds. Once the funds are paid to IRS and applied to the account the IRACS controls may be closed. If the funds are released for any reason the IRACS control should also be closed once the collateral is no longer being held. Write “VOID” across all pages of the escrow agreement and forward back to the taxpayer.

Preparation and Issuance of Certificates of Discharge

  1. Prepare the Form 792, U.S. Certificate Discharging Property Subject to the Estate Tax Lien, in duplicate, one copy is sent to the estate one is kept for IRS records. The form is available as a PDF fillable form from the Publishing website, http://core.publish.no.irs.gov/forms/internal/pdf/f792--2016-06-00.pdf.

    1. Block or line out the unused area in the description portion of the form so as to prevent the insertion of a description of other property.

    2. Do not modify form or content of lien certificates at the request of local recording offices.

    3. Redact Social Security Numbers (SSNs) that appear on the certificate so only the last 4 digits are shown. Employer Identification Numbers (EINs) should be redacted in a similar manner (e.g., xx-xxx1234).

    4. Only reference that the discharge is being granted under IRC § 6325(c).

  2. Upon receipt of the closing documents, ensure the requirements listed in the conditional commitment letter have been met. Generally this includes the actions described below:

    1. Review the copy of the recorded deed (for discharge) or mortgage for accuracy.

    2. Review the copy of the final settlement statement and reconcile any differences from the preliminary statement to ensure proper accounting of all funds.

    3. If applicable, receive payment of the amount specified in certified funds or other acceptable form.

  3. Deliver the original of executed Form 792 to the applicant after all requirements are met. Advise the applicant of their responsibility to file the document with the appropriate recording office. If any payment received is not by certified funds, withhold issuance of the certificate until it is verified that the payment has cleared.

  4. Post all payments received in conjunction with certificate applications on the date of receipt.

  5. It is the responsibility of the applicant to record the certificate unless a particular recording agency only records certificates presented by the Service. If Advisory must file the certificate, no filing fee need be collected from the applicant.

  6. See retention guidance in IRM 5.5.8.19.

Denied Requests for Certificate of Discharge

  1. Issue a denial letter, Letter 1352, Request for Discharge of Estate Tax Lien when the proposed request is not acceptable or discrepancies in the amount of the Government's interest cannot be resolved. See IRM 5.12.10.12, Denial of Applications for Discharge or Subordination .

  2. Enclose Pub 1660, Collection Appeal Rights, with the denial determination letter.

  3. Document the case history with the reason(s) for denial.

  4. Advisory closes its NFOI control on ICS fifteen (15) calendar days after sending the denial letter.

  5. Process any appeal requests received from the taxpayer in accordance with standard appeal processing. See IRM 5.1.9, Collection Appeal Rights.

  6. If a timely CAP appeal is filed, maintain an open NFOI until resolved.

Request for Subordination under IRC § 6325(d)

  1. Applications for subordination under IRC § 6325(d) will be processed by Advisory to make a determination if the United States will be adequately secured after such subordination. The Service is not required to issue a subordination but may do so when it is in the best interest of the Government to do so. Requests for subordination will normally be made under IRC § 6325(d)(2) or (d)(3). Provided it is determined that the amount realizable by the United States from the property will ultimately be increased, or that the ultimate collection of the tax liability will be facilitated by the subordination, a certificate may be issued.

  2. Above discharge factors should be considered such as:

    • Has a special election lien been secured?

    • Have events occurred that would disqualify the estate for the special election that results in additional tax due?

    • Should a recapture tax return be secured?

    • Is all of the special use property impacted or only a portion?

    • Are there other estate properties should the subordinated creditor not be paid?

    If Form 706 has not been filed or if a closing letter has not been issued, Advisory will consult with E&G Exam in order to determine the Government's lien interest.

  3. In addition, consider general guidance concerning processing of subordinations in IRM 5.12.10.6, Subordination of Lien, when reviewing subordination requests.

  4. The instructions for applying for a subordination can be found in Pub 1153, Certificate of Subordination of Federal Estate Tax Lien Under Section 6325(d) of the Internal Revenue Code.

  5. A subordination will be issued using Form 669-F, Certificate of Subordination of Federal Estate Tax Lien. All SSNs must be redacted, for example, XXX-XX-1234V.

Estate Tax Extension of Time to Pay Under IRC 6163

  1. IRC 6163(a) permits an extension for paying estate tax on the value of a reversionary or remainder interest in the property included in the gross estate. The time for payment will be postponed for six months after the termination of the preceding interest in the property. See IRM 4.25.11.10, IRC 6163 - Election Examination, for information on E&G Exam processing and IRM 4.25.2 for Campus processing procedures.

  2. General responsibilities:

    • E&G Exam analyzes the election and works with Advisory and Counsel to secure the bond. Counsel ensures the language in the bond is sufficient.

    • E&G Campus will send a copy of the return to Advisory with a note indicating the IRC 6163 election by the estate. E&G Campus monitors the case file and issues an annual letter to the estate to ensure that the condition precedent was not triggered.

    • Advisory maintains controls on the bond. The bond must be equal to twice the amount of tax deferred under IRC 6163. Advisory will provide a copy of the Form 2276, Collateral Deposit Record, to E&G Campus to be maintained with their case file.

  3. The bond will be maintained in the IRACS database. Refer to IRC 5.6.1.5, Advisory Actions and IRM 5.6.1.7.2, Interim Revenue Accounting and Control System (IRACS), for procedures on establishing and monitoring controls.

  4. E&G Campus will communicate to Advisory the termination of the precedent interests and that the freeze has expired. Once the condition precedent is triggered Advisory will initiate collection proceedings, against the bond if necessary. A courtesy investigation will be sent to a revenue officer to initiate collection action against a bond if not previously resolved by Advisory .

Retention of Advisory Estate Tax Lien Files

  1. Keep original or copies of all documents that relate to investigation of lien certificate applications. Specifically, keep the following in case files during investigation of applications and after investigations are complete:

    • Original application and attachments

    • A copy of the notice of estate tax lien to which the application or investigation applies (or document the ICS history if the IRC § 6324(a) lien applies)

    • All documents referenced in the ICS history

    • A copy of the signed certificate or letter issued as a result of the investigation.

  2. Advisory must print all lien agreements, forms and correspondence with the estate, and any documents issued through ICS that cannot be retrieved. Any forms, correspondence with taxpayers related to extensions to pay, notices of termination of special elections, notices of tax due or late installment payments are used as evidence in litigation cases and to calculate or support CSED calculations. This includes copies sent to persons having power of attorney for the estate.

  3. The retention period for estate tax case files is two years after the account is closed (ST12) not two years after Advisory closes the case. These case files contain key documents that are used as evidence in litigation cases.

  4. Before any lien discharge case file is destroyed, current IDRS transcripts should be obtained to ensure that there is no balance owed on the account. If IDRS reflects there is a balance due on the account do not destroy the file.

  5. A best practice is to destroy only after the assessment SOL has expired, or there is no TC 420 or 520 and with assurance that there is no outstanding balance on the tax module.