IRS Taking Tougher Stance On Estate Tax Repayment Schemes

by Mike Godfrey, Tax-News.com, Washington

25 April 2003

Recent reports have suggested that the IRS is taking a tougher line on the collection of estate taxes, which are often settled in the form of long-term payment plans to the agency, in recognition of the fact that the often substantial amounts owed cannot always be paid off in one go.

At present, section 6166 of the Internal Revenue Code allows firms up to 14 years to pay off their estate taxes. The terms of the payments are seen as quite generous, and for the first five years, all that is required to be paid is interest at 2%. Thereafter, the business has to pay both the tax and interest. The system was designed in this way so that firms would not have to be sold off in order to pay off a huge lump sum.

However, it has emerged that in the past the IRS did not properly enforce rules relating to the security of these loans in the event of a default, leading the agency to fall short of its collection targets as a consequence, according to a March 2000 Treasury Department report.

This review showed that in 93% of cases, the IRS failed to secure such repayment schemes with a bond or lien. This equates to $1.3 billion of the $1.4 billion in tax balances covered by this type of instalment agreement. Consequently, some $50 million was left uncollectable as a result of defaults on unsecured instalments.

The IRS is now insisting that businesses secure these long-term payments, usually against a bond. However, observers don't see this as a particularly extreme move by the IRS, and the generous terms of the repayment arrangements tend to outweigh the downside of the collateral requirement. Nevertheless, according to reports, some advisors are telling clients to consider life insurance policies that will ensure tax bills can be paid up front.

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