IRS Tightens Loans to Pay Estate Taxes

When an entrepreneur dies, heirs must sometimes sell the family businesses to pay the estate taxes. Recognizing this burden, the Internal Revenue Service (IRS) allows qualified businesses to use a low-interest installment plan. Even so, some businesses take advantage of the financing arrangement, often failing to make their payments. Now, the IRS is getting tough, requiring installments loans to be secured with a bond or lien, according to an April 17th article in Business Week Online.

Section 6166 of the Internal Revenue Code gives businesses up to 14 years to pay estate taxes. For the first five years, the business need only make interest payments at 2 percent. The business then has up to 9 years to pay the tax and interest. This structure gives businesses the opportunity to pay the tax over time, rather than in one lump sum.

Section 6166 also allows the IRS to secure the loan, either through a surety bond for double the tax amount or a lien. However, a March 2000 report by the Treasury Department Inspector General for Tax Administration, suggests that the IRS was lax in securing the loans, despite the long-term nature of the agreements. The report shows that the IRS did not secure 93 percent of installment loans and was unable to collect $50 million from 252 estates, which defaulted on installment agreements that lacked a bond or lien.

In an attempt to up its collection efforts, the IRS is now requiring businesses to secure loans. Some estate planners don’t see the clamp down particularly onerous, believing that the generous terms of the installment plan overcome the negative of a lien. However, other experts are advising clients to consider alternatives, such as limited family partnerships or life insurance policies that can provide the cash to pay the taxes upfront.

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