Estate tax liens prove to be tortuous obstacles
Is the IRS’s Examination Estate Tax Lien Group watching 30-year-old film classics? Apparently they are.
Gordon Gekko (Michael Douglas) in "Wall Street" tells his shareholders that “greed, for lack of a better word, is good.” Fast forward to 2017. The IRS’s Examination Estate Lien Group appears to be taking Gekko’s mission to its heart, implementing tough estate tax lien substantiation rules. These lien rules enhance the IRS’s opportunity to claim its “last clear chance” payments for the decedent’s estate tax. Never mind that this “last clear chance rule” is just a tort law concept.
In its grandiose terms, the U.S. government automatically imposes its potential claim on each eligible decedent. The IRS would impose such an estate tax lien whenever, and wherever, a U.S. person dies. The U.S. government automatically enforces this estate tax lien without giving advance notice to the executor, to the decedent’s heirs or to creditors. The estate tax lien can often be a nasty surprise to parties having property interests subject to the lien. These parties might need to spend many months—or years—to remove these estate tax liens.
The estate tax lien statute automatically attaches the lien to all property in the decedent’s gross estate. The lien continues for 10 years, beginning with the date the decedent died. The heirs and executor have no power to sell the decedent’s property during this 10-year period unless the executor or the decedents’ heirs agree to protect the U.S. government’s interest in the property in question. Needless to say, an executor and its tax advisers can be subject to malpractice for neglecting the IRS’s estate tax obligations, or by subverting the U.S. government’s lien process.
The IRS recently expanded its estate tax lien procedures and payment obligations of the executor, heirs and tax advisors. The initial starting point for the estate tax lien process traditionally has been the Form 706 filing, the United States Estate (and Generation Skipping Transfer) Tax Return. Now the Form 706 preparer must meet a broader estate tax lien standard. The executor or other preparer must demonstrate to the IRS that the executor or preparer “adequately provided for” the government’s interest in the estate. The tax rules treat this “adequacy” standard as meaning the executor or others have adequately protected the U.S. government’s secured interests in the property in question.
Here’s how the lien process works: Section 6324 establishes special liens for estate and gift taxes. Section 6324(a)(1) imposes this onerous potential 10-year lien. Section 6324(a)(2) transfers the lien obligation to the transferee. Section 6325(a) addresses how the lien process works, including the bond process. Section 6325(b) addresses the lien discharge process. Section 6325(c) specifically describes federal estate tax lien discharges.
How to Obtain a Lien Release from the IRS
As you might expect, the lien release program has its own complexities, especially for executors, tax advisors and heirs coping with the state law probate process. In some cases, the IRS is requesting documents before the executor, tax advisor and heirs have these documents. We suggest the parties lay out this documentary process to the heirs in advance. This estate tax process can be complex to many potential heirs. These heirs may face the possibility of state estate tax liens in multiple jurisdictions and face complex probate rules.
The U.S. government has developed two lien removal processes for potential property transfers. These IRS rules differentiate between general federal tax lien removal procedures and estate tax lien removal procedures:
• Form 14135 explains the process by which an individual can seek a certificate of discharge for property subject to a federal tax lien.
• Form 4422 explains the process by which an individual can seek a certificate of discharge for property subject to an estate tax lien.
Practitioners might—erroneously—view the filing of Form 4422 (March 2017), the Application for Certificate Discharging Property Subject to Estate Tax Lien, as being the beginning and end of their estate tax lien obligations. Form 4422 does not require the executor, tax preparer or heir to file Form 706 before filing Form 4422, but the IRS has access to both forms and stands ready to examine them. The executor needs to coordinate these two forms. The IRS will normally negatively view valuation amount differences in situations where the Form 4422 gross estate valuation differs sharply from the Form 706 estate tax valuation.
The IRS’s new estate tax lien procedure appears to look in part towards the Form 14135 general lien discharge rules. The executor can escape from the estate tax lien rules by (1) submitting Form 4422 and closing documents escrowing the net proceeds to an acceptable IRS agent, or (2) depositing the entire amount with the IRS until the IRS and taxpayer reach a closing letter, or (3) dispensing with the escrow if the IRS accepted the return as filed as being a non-taxable estate. The IRS, in the past, has exempted the latter estate lien rules from these specific discharge criteria.
The government applies more specific detailed rules for a broad category of property, i.e., property that the executor or heir might sell, transfer or mortgage. Then, Form 4422 looks to narrower real estate property issues, such as farm or business property and payment deferrals.
Form 4422 presupposes the executor will seek a discharge from the estate tax lien to sell or otherwise dispose of the decedent’s property. The executor must attach the following estate-related documents to secure the IRS’s consent: a short form of letters testamentary, a copy of the will (if any), a copy of the sales contract, the closing statement or proposed closing statement for the property in issue, a copy of Form 706, and a copy of the decedent’s inventory and appraisal reflecting all estate assets.
One might suppose the IRS is greedy for information. As Gordon Gekko said, “Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.”