5.5.6. Collection on Accounts with Special Estate Tax Elections

(1) Purpose: This IRM section provides background information and procedures for Field Collection employees who are responsible for collection of estate tax when a special estate tax election has terminated.

(2) Audience: The guidance in this IRM is for Field Collection revenue officers investigating estate tax balance due cases.

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

(4) Program Owner: Collection Policy, Global Strategic Compliance, oversees policy and guidance for the estate tax collection program.

(5) Primary Stakeholders: The primary stakeholder is SB/SE Field Collection. Other functions that are affected by, or have input to, these procedures include Chief Counsel, IRS Independent Office of Appeals, Estate and Gift Examination, and Campus Estate and Gift.

(6) Program Goals: This IRM provides the fundamental knowledge and procedural guidance for Field Collection revenue officers that investigate and resolve estate tax cases when a special estate tax election has terminated.

(1) IRC section 6166 provides an extension of time to pay Form 706 estate tax in annual installments. Generally, the maximum amount of time for payment of deferred tax is 10 years. The executor may select a shorter period, in which case the deferment will be the period selected. It allows executors a fourteen year period to pay estate tax attributable to an estate’s interest in a closely held business. It grants the estate a deferral period to make interest only payments for the first four years. The first tax payment along with interest payment is due on the 5th anniversary of the due date of the return. See IRM 4.25.2.8.3.1, General Information.

(2) The IRC section 6166 estate tax installment plans are approved by Exam Estate & Gift Specialty Tax. The Estate & Gift Tax Campus unit will make a preliminary determination if the estate qualifies for the installment payment privilege. This election should not be confused with the one year IRC section 6161, Extensions of Time to Pay Estate Taxes, which are approved by Advisory (see IRM 5.5.5). Collection function does not have authority to approve deferred installments plans under IRC section 6166.

(3) The election to pay in installments must be made on a timely filed Form 706 on page 2, Part 3, Elections by the Executor, Line 3 and by attaching a notice of election to the return containing the information specified in Treas. Reg. 20.6166-1(b). Late filing of the return invalidates the election. However, if a return is timely filed without the election but an amended return containing the election is filed within 6 months of the non-extended due date of the Form 706, the election is considered timely.

(4) 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.

(1) The criteria for qualifying for installment payments are:

• Decedent was a citizen or resident of the United States on the date of death.

• The value of interest in closely held business must exceed 35 percent of the adjusted gross estate.

• The return is timely filed, and the IRC section 6166 election request was included on the timely filed return or an amended return within 6 months of the non-extended due date of the return.

(2) An interest in closely held business is defined as:

• A proprietorship that carries on a trade or business.

• An interest in a partnership that carries on a trade or business. Deceased partner's interest that is included in the gross estate must be 20 percent or more of the total capital interest in the partnership or the partnership has 45 or fewer partners.

• Stock in a corporation carrying on a trade or business if 20 percent or more of the value of voting stock of the corporation is included in the gross estate, or the corporation has 45 or fewer shareholders.

(3) For more details on qualification, see IRC 6166, Extension of time for payment of estate tax where estate consists largely of interest in closely held business, and IRM 4.25.2.8.3.1, General Information.

(4) IRC section 6166(h) provides for the election to defer the deficiency tax resulting from an examination if the estate is not already making payments under IRC section 6166. The IRC section 6166(h)(2) election must be made within 60 days of the issuance of the notice and demand. The deficiency is prorated per the formula in IRC section 6166(a). The estate cannot defer more than the deficiency. The estate may not elect to defer any portion of a deficiency that was due to negligence, intentional disregard of rules and regulations, or fraud with intent to evade tax.

(5) IRC section 6166(e) provides for the proration of deficiency installments if the estate is paying in installments under IRC section 6166 when the assessment is made. The part of the deficiency attributable to the closely held business shall be prorated and added to the installments. The deficiency portion of an installment that is due and payable when the deficiency assessment is made shall be paid upon notice and demand.

(6) Non-deferred tax must be paid by the return due date, unless the estate has an extension of time to pay under IRC section 6161. If the estate does not pay the non-deferred tax, procedures in IRM 4.25.2.8.3.12, Computing Interest and Penalties, will be taken by the Estate & Gift Tax Campus unit.

(7) These accounts can be identified on IDRS by status 14 or transaction code (TC) 488. The TC 488 indicates the account is in installment and/or manual billing and updates the module to status 14.

(1) IRC section 6166(g)(1) provides for acceleration of installments. The balance of installments are accelerated upon notice and demand if:

• Any portion of an interest in the qualifying business is distributed, sold, exchanged or otherwise disposed of, or money or property attributable to the interest is withdrawn from the business, and the aggregate of such distributions, withdrawals, etc. equals or exceeds 50 percent of the value of the entire interest, measured at the value reported on the Form 706 or as adjusted. Dispositions are cumulative, so a record should be kept of dispositions.

• The estate fails to make all of an annual installment payment within 6 months of the due date.

• The election may be terminated because the estate fails to provide security (lien or bond) to the Service for tax due if the Service has determined that security is necessary. The Service may make this determination at the time of the estate's IRC section 6166 election, or it may make the determination at some point during the IRC section 6166 installment agreement. Most likely this will happen when the estate has failed to pay after requesting an extension of an annual installment payment or when the Service determines that the underlying business may be in financial difficulty.

(2) When accelerated, the estate will be sent a series of letters from the Advisory Estate Tax Lien group and the Campus concerning termination and demand for the tax due. Advisory procedures are explained in IRM 5.5.8.5, Collateral from Estates with IRC 6166 Elections, and Campus procedures in IRM 4.25.2.8.5, Miscellaneous IRC Section 6166 Campus Termination Issues.

(3) Copies of termination letters provide a payoff of the full amount of tax due to a specified date. This payoff can be used for collection purposes until the estate provides a date it will pay the account in full. Since the account was in Status 14, the campus will need to provide a payoff when necessary. Advisory should also have copies of termination letters in their case files and copies of liens, bonds, or financial information secured from the estate.

(4) Once an account has been accelerated, it cannot be reinstated for reasonable cause. An account can be reinstated only if a valid extension of time to pay (under IRC section 6161) has been filed for the amount in question prior to the due date or the account was erroneously accelerated due to a processing error. A processing error is one in which a timely payment was treated as late or posted to the wrong account or type of tax. These errors should be rare, and an account should be reinstated only if it meets these guidelines. Neither Examination nor Collection has the authority to request reinstatement of an account other than in the above circumstances.

(1) IRC 7485, Bond to Stay Assessment and Collection, allows for collection of an amount determined as a deficiency while a Tax Court decision is being appealed to the Circuit Court unless the taxpayer posts a bond.

(2) If you receive an account to collect estate taxes, and the IRC 6166 election is either in Appeals or Tax Court for reconsideration, consult with Counsel to determine if collection can proceed, or if collection should be withheld.

(3) Counsel will consider whether the underlying tax amount is in dispute, how much time remains on the IRC 6324(a)(1) estate tax lien, and collection potential on the remaining estate assets when providing guidance concerning continuation of collection.

(1) The laws granting the estate tax installment election provide the Service certain options to secure eventual payment. These options include:

1. Requiring the estate to furnish a performance bond in an amount equal to the estate tax and interest being deferred. Bonds must be renewed annually with documentation provided to the Service verifying renewal.

2. Allowing the estate to substitute the bond with the filing of a special lien under IRC section 6324A (Form 668-J) pledging their right, title, and interest to specific property to the government.

(2) The Advisory Estate Tax Lien group is responsible for making determinations concerning securing special election liens or bonds to protect the Government’s interest during the extended deferral period. See IRM 5.5.8.5.1, Risk Reviews on Estates With IRC 6166 Elections.

(3) For IRC section 6166 elections, the Form 668-J, Notice of Federal Estate Tax Lien Under Internal Revenue Code Section 6324A, is secured and recorded by Advisory. The Form 13925, IRC Section 6324A Lien Agreement Form, reflects specific property that is pledged as collateral, the value, encumbrances, and parties who consented to the lien. This lien is not recorded on the Automated Lien System (ALS) since the CSED is extended beyond the normal ten year expiration date. A TC 582 may be on the account to reflect a lien has been recorded. You may find information in the ICS case history of Advisory actions.

(4) There will not be an IRC section 6324A lien in every case where the Service has agreed to an IRC section 6166 installment election. The Service will make a determination after the election whether it will need security based on the facts and circumstances of each case. The Service may require the estate to secure a bond. The estate may elect the IRC section 6324A lien in lieu of securing a bond.

(5) The IRC 6324A lien is a consensual lien. Therefore, the estate does not have CDP rights. A bond may be substituted for the lien. See IRM 5.5.8.5.1, Risk Reviews on Estates with IRC 6166 Elections.

(6) When the election has been terminated and the tax accelerated, collection action may be taken on the asset pledged on this lien agreement. Advisory can provide copies of their lien case files to assist with collection of the tax due. Advisory will also provide the lien release when necessary. To determine the duration of the lien, the CSED is extended for the period of time that the tax was deferred, including any extensions to pay that may have been granted.

(7) If the property described on Form 668-J is insufficient to pay the estate tax in full, then any other property that remains attached by the IRC section 6324(a) lien (including the like lien) and/or the IRC section 6321 liens are subject to enforcement action. Distributees of the estate property also may be held liable as transferees.

(1) Always check the Collection Statute Expiration Date (CSED) when working estate tax accounts. IDRS does not accurately reflect the CSED when multiple assessments are involved or when an IRC 6166 , Extension of time for payment of estate tax where estate consists largely of interest in closely held business, election has been granted.

(2) For accounts with an approved IRC 6166 election, the CSED is suspended for the period during which payment of the tax is deferred. See IRC 6503(d), Suspension of running of period of limitations. However, running of the IRC 6324(a)(1) estate tax lien is not suspended. See IRM 5.5.7.11.1, IRC 6324(a)(1) Estate Tax Lien.

(3) The collection statute is suspended at the time that the tax is assessed (TC 150 or TC 290/300 date) to the date that the IRC 6166 election went into default as indicated by the TC 489 date input on Integrated Data Retrieval System (IDRS). See IRM 5.5.7.6.2, CSED - IRC 6166 Deferred Tax.

(4) An estate can request an IRC 6161 extension of time for paying tax on an IRC 6166 installment payment for up to one year at a time. Both the IRC 6166 election and the IRC 6161 election suspend the collection statute. When more than one action suspends the running of the collection statute, and the suspensions overlap, the collection statute is suspended only once. See IRM 5.1.19.3, Case Actions That Can Suspend And/Or Extend A CSED. In these situations, the calculation of the CSED should be based on the time that the estate had the IRC 6166 election since the IRC 6161 extension of time to pay the annual installment would overlap with the IRC 6166 election.

(5) It is possible to have multiple CSEDs if an account has a TC 290 or TC 300 additional tax assessment, and a portion or all of the deficiency was deferred under IRC 6166. For the portion of the tax that was deferred, the collection statute is suspended for that portion of the tax while the IRC 6166 election was in effect. Determine if payments on the account paid off the deferred amount of tax associated with the TC 150 original tax assessment. In that case, the collection statute is only suspended on the TC 290/300 additional tax assessment while the IRC 6166 election was in effect.

(6) Any tax due that was not deferred under IRC section 6166 will have a different CSED. Form 4349, Computation of Estate Tax Due With Return and Annual Installment, will show the amount of tax that was deferred under IRC 6166 . Campus Estate and Gift may have this information on the Campus database, or the form may be with the tax return.

(7) Other actions such as a transaction code (TC) 520 input due to a Collection Due Process hearing or a TC 480 input due to an offer in compromise can also impact the CSED. See IRM 5.1.19, Collection Statute Expiration, for additional information on events that impact the CSED.

(8) Once you determine the correct CSED, document your ICS history with the new CSED and how you arrived at the date. Be sure that the information is also updated on ICS.

(1) Payoffs for IRC section 6166 accounts will need to be secured from the Campus E&G unit. Once an account goes into status 14, you can no longer get a payoff through IDRS. If IDRS reflects manual assessments of penalty and interest, accrued penalties and interest need to be computed. For Campus E&G contacts, see Estate and Gift Tax Knowledge Management.

(2) After an IRC section 6166 account is accelerated, the Campus closes their case file. Partial information regarding these accounts are maintained on their database. The Campus may need to secure additional information from the collection case file or order their closed file in order to provide a payoff.

(3) Copies of termination letters issued by the Campus provide a payoff of the full amount of tax due to a specified date. This payoff can be used for collection purposes until the estate provides a date it will pay the account in full. Advisory should also have copies of termination letters in their case files and copies of liens, bonds or financial information secured from the estate.

(4) Once the status 14 is input, FTP and interest need to be calculated and manually input. The last TC 340 on the account will reflect to what date the interest has been updated. When a collection account assigned to the field is paid in full, the revenue officer is required to request input of the penalties and interest to the date of payment to prevent refunds.

(5) The manual assessment can be requested on Form 3244 when posting funds received, or if the funds have posted, request the assessment on Form 4844.

(6) Submit a Form 4844, Request for Terminal Action, to the CCP Fort to request assessment of accruals once the balance due is paid. Send your request to the CCP Unit at the e-mail address shown on Estate and Gift Tax Knowledge Management.

(7) Do not abate penalties or interest assessments made by the Campus in accordance with their IRM provisions - unless you verify there was a Service error.

(1) When conducting your initial analysis of the account, check TXMOD for the following:

• Check the last TC 340. Interest was assessed to this date only.

• Is there a TC 582 lien indicator or a TC 360 for a lien fee? Is it an IRC section 6321 lien or IRC section 6324A lien? – you may see special lien indicated. Check ICS history, archive history, or with Advisory for previous action on the account.

• How much time, if any, remains on the IRC section 6324(a) lien? During the time the taxes were in status 14, the ten-year estate tax lien continued to run.

• Check for TC 468, status 14 input, and TC 488/489. Compute the CSED and document the CSED date in your ICS history.

• Check for transaction codes and TXMOD/ENMOD history for appeals, penalty abatement requests, amended returns, etc. Educate yourself on what happened with this account before it came to you – it will help you make future decisions.

(2) Secure copies of the following documents:

• Letters from Campus/Advisory terminating the election (Letter 950-H or I, Letter 6335-F for balance due amounts). See IRM 5.5.8.5, IRM 4.25.2.1.15, and 4.25.2.1.16 concerning IRC 6166 procedures.

• Any related appeals or Tax Court decision or settlement documents. Is it pending or resolved?

• Liens filed by Advisory to determine what property was pledged as collateral on deferred tax due (Form 668-J and Form 13925) and any correspondence pertinent to collection of the tax due.

• Copy of any bond secured by Advisory.

(3) As part of your collection investigation:

• Research the status of the business – is it sold, bankrupt, expanding and funds went elsewhere? Investing funds hoping for big payback later? Do an internet search for information on the business. The estate had a large interest in a closely held business to qualify for this election.

• Determine if the business was sold – if so, did IRS receive any of the sale proceeds? If not, where are the sale proceeds? If more than fifty percent of the closely held business was sold, the election is terminated.

• Find out where funds used to make installments payments were coming from. This may provide a potential levy source.

• Contact Advisory. Their case file may have financial information on the business and/or estate assets used for lien collateral evaluation. Secure and review this information for collection potential.

• Secure the 706 return. Campus and/or Advisory may be able to provide partial copies of the 706 return until you receive the entire tax return for review.

• Determine if the executor or other fiduciary received a discharge of liability under IRC section 2204. The application for discharge and the letter granting the discharge should be attached to the Form 706.

(4) If a special lien was secured:

• Collateral listed on a 668-J lien and/or Form 13925 will provide legal descriptions of property pledged as collateral for tax due – this is the asset to pursue for collection of tax due.

• Determine the current status of property pledged as collateral.

• Make demand for payment. The amount in the Letter 6335-F may be used until the estate requests a payoff. Send pre-levy notice if there is seizure potential.

(5) If a special lien was not secured:

• Was a section 6165 bond provided?

• What is date of death – did the IRC section 6324(a) lien expire?

• Was an IRC section 6321 lien recorded? What does it attach to?

• What estate assets remain to collect from?

• If property was sold, was a discharge of the property from any liens recorded?

• Contact executor and/or responsible parties to pay installment payments, demand payment, determine what remains to collect from.

• Consider transferee against those who received estate assets or fiduciary liability against those that were liable to pay installments. See 6166 election information with the 706 return and determine to whom letters were sent from the Campus for annual installments.

(6) After conducting your fact finding, contact the estate representative and determine how the estate will pay the tax due.

(1) An estate may also be eligible for an IRC 2032A, Valuation of certain farm, etc., real property, special use valuation election which allows an estate to specially value real property used in a family-owned business. This election must be approved by E&G Examination. The IRC 2032A election is reported on Schedule A-1, Section 2032A Valuation, which is attached to Form 706 , United States Estate (and Generation-Skipping Transfer) Tax Return. The election is identified on Page 2 of the 706 return. See Part 3, Elections by the Executor.

(2) If the estate qualifies for the IRC 2032A election, the estate receives a tax savings. The qualified heir(s) must not dispose of any interest in the qualified real property (other than by a disposition to certain family members or a qualifying like-kind exchange) or cease to use the qualified real property for the qualified use for ten years after the decedent’s death. If an heir does not maintain these requirements, an additional tax (also known as recapture tax) is triggered. See IRM 5.5.8.4, IRC 2032A Special Use Valuation Elections, for specific details concerning this election.

(3) The ten-year statute of limitations for collection of the additional estate tax (also known as recapture tax) against the heirs does not begin until tax is assessed against the heir after the triggering disposition or cessation of qualified use. The recapture tax must be reported and paid on Form 706-A, United States Additional Estate Tax Return, or, if not reported on Form 706-A, may be asserted in a deficiency notice. A Form 706-A tax liability is assessed under the beneficiary’s social security number on Non-Master File (NMF), and the return is due six months from the date that the event occurred to trigger the tax liability.

(1) The IRC 2057 election for valuation of the qualified family-owned business interest is reported on Schedule T, Qualified Family-Owned Business Interest Deduction. If the family members dispose of or fail to materially participate in the business or the business is sold within 10 years after the date of the decedent’s death, the recapture tax will be triggered. See the Code section for specific details concerning this election.

(2) Any recapture tax is reported and paid on Form 706-D, United States Additional Estate Tax Return – Under Code Section 2057, or, if not reported on Form 706-D, may be asserted in a deficiency notice. IRC 2057 was repealed in 2014. This section does not apply to estates of decedents who died after December 31, 2003. See IRC 2057 (j), Termination. Though the election can no longer be taken, you may receive a collection account for the recapture tax due if the qualified family-owned business did not continue to be operated by family members for the ten-year period.

(1) The recapture tax account is assessed as a NMF account, MFT code 53, under the heir’s SSN with an N indicator.

(2) The due date for the return is within six months of the disposition or disqualification of the business.

(1) When an IRC 2032A, Valuation of certain farm, etc., real property, or IRC 2057, Family-Owned Business Interests, election is granted, a tax lien under IRC 6324B , Special lien for additional estate tax attributable to farm, etc., valuation, arises. The IRC 6324B lien protects the government's interest in the event that the additional estate tax (also known as recapture tax) is assessed due to termination of the election.

(2) Form 668-H, Notice of Federal Estate Tax Lien Under Internal Revenue Laws, is prepared by Advisory Estate Tax Lien Group and recorded in the public records. The lien specifically identifies the property subject to the lien. All parties with an interest in the asset that qualified the estate for the election must consent to the recording of the IRC 6324B lien by completing Schedule A-1 or Schedule T of Form 706 , United States Estate (and Generation-Skipping Transfer) Tax Return.

(3) The closely held businesses and real property use that qualified the estate for the IRC 2032A or IRC 2057 election are monitored by the Advisory Estate Tax Lien group. Secure a copy of the lien from Advisory to determine which assets are pledged as collateral. Collection action may be taken on the assets specified on the lien. Advisory responsibilities are outlined in IRM 5.5.8, Advisory Responsibilities for Processing Estate Tax Liens.

(4) These liens are not recorded on Automated Lien System (ALS). There might not be an open module under the estate's social security number (SSN) to input the TC 582, Lien Indicator. Advisory can provide copies of their lien case file, and they will provide the lien release when necessary.

(5) These liens arise at the election and are consensual liens since all parties with an interest in the qualifying asset must consent to the recording of the lien when they sign a completed Schedule A-1 or Schedule T to make the election. Therefore, the executor of the estate and qualified heirs do not have Collection Due Process (CDP) or Collection Appeals Program (CAP) rights related to this lien.

(6) The property covered by the lien for the IRC 2032A election is the interest in the qualified real property. The property covered by the lien for the IRC 2057 election can be either real or personal property.