TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
THE INTERNAL REVENUE SERVICE CAN IMPROVE THE ESTATE TAX COLLECTION PROCESS
Reference No. 2000-30-059
Approximately 95,000 estate tax returns are filed with the Internal Revenue Service (IRS) annually totaling $17.0 billion in tax liability. Since estates usually have a significant net worth before a tax return is required, estate taxes should be collectable in most cases. However, in September 1998, there were 11,375 estate accounts with tax balances due totaling $3.2 billion. This review covered the IRSí efforts to effectively collect estate taxes while protecting the rights of taxpayers.
The IRS can improve its estate tax collection processes for evaluating installment agreements and payment extensions, filing and releasing liens, and calculating the statute of limitations. Overall, weaknesses in these processes led to difficulty in collecting revenue, increased costs to administer tax laws, inaccurate records, and taxpayer burden.
Internal Revenue Service Employees Did Not Take Necessary Actions When Granting Installment Agreements and Extensions of Time to Pay
Estates may need to sell assets to pay the estate tax. To minimize taxpayer burden, the Internal Revenue Code (I.R.C.) allows estates low-interest installment agreements or payment extensions if certain requirements are met. However, the IRS did not consistently follow provisions to protect the governmentís interest or rights of taxpayers.
Estate Tax Installment Agreements Were Not Secured by a Bond or a Lien for the Full Term of the Agreement
An estate may elect to pay its tax liability in low-interest installments if a closely held business accounts for at least 35 percent of its assets. These installments can last for over 14 years. The I.R.C. allows the IRS to secure a bond or a lien when granting this type of installment agreement. However, the IRS offices we reviewed did not secure bonds or liens at the time these installment agreements were established. Nationwide, $1.3 billion of the $1.4 billion in tax balances (93 percent) under this type of installment agreement were not secured with a bond or lien for the full term of the agreement.
These unsecured installment agreements increase the risk that the IRS will not be able to collect the taxes. At the time of our review, the IRS was attempting to collect $177 million in overdue tax balances involving 187 defaulted installment agreements that do not have bonds or liens. The IRS has also determined that $50 million due from 252 estates with defaulted installment agreements and without bonds or liens are no longer collectable.
Requests for Extension of Time to Pay the Estate Tax Were Not Properly Evaluated
The I.R.C. allows an extension of time to pay estate taxes if the estate can show reasonable cause. However, for a sample of 243 estate accounts (totaling $182 million) that were granted payment extensions, 84 accounts (totaling $57 million) did not include enough information to demonstrate reasonable cause.
Granting payment extensions for estates that do not show reasonable cause increases the risk that the IRS may not be able to collect the taxes. At the time of our review, the IRS was attempting to collect $67 million from 338 estates that did not pay the tax by the extended due date. It has also determined $33 million is no longer collectable from 271 estates that did not pay by the extended due date.
Estates With Payment Extensions Were Not Assessed Interest
An extension of time to pay prevents penalties for late payments; however, interest continues to be assessed from the due date of the tax return. The IRS manually calculates the interest for estates with payment extensions. From a sample of 243 estates with payment extensions, $941,000 of interest was not assessed on 10 of the estates.
Estates with Extensions to Pay and Installment Agreements Were Not Properly Advised of Their Taxpayer Rights
The IRS is required by the Taxpayer Bill of Rights to provide all taxpayers with a tax balance and explanation of their collection rights. When an estate is granted a payment extension or installment agreement, the IRS uses a special computer code to identify the estate. Using this computer code when processing the tax return prevents these estates from receiving a tax balance due notice with an explanation of their rights. Nationwide, 9,300 estates with payment extensions or installment agreements did not receive a balance due notice with an explanation of their rights.
Collection Employees Did Not Properly Record or Release Estate Tax Liens
The IRS can file a notice of federal tax lien with a county or state to record its interest in the assets of an estate until the tax obligation is paid. Tax liens that have been filed with a county or state on many estate accounts were not recorded properly on IRS computer systems and were not released timely.
IRS computer files indicate 1,270 estate accounts still had tax liens in effect an average of 3.6 years after the tax balance had been paid. This total may be much higher since collection cases with tax liens are sometimes not shown on any IRS computer system.
The Internal Revenue Service Computer System Did Not Calculate the Collection Statute of Limitations Expiration Correctly
For a sample of 100 estate accounts reviewed, tax totaling $36.8 million on 55 estate accounts was abated prematurely by an average of 6.4 years. In addition, tax totaling $10.9 million on 31 estate accounts was abated late by an average of 4.4 years. The tax was improperly abated because a computer system had not calculated the Collection Statute Expiration Date (CSED) accurately. In many cases the CSED has since been corrected; however, some estate tax balances have not yet been reinstated. Incorrect calculation of the CSED is not unique to estates; $99.5 million in tax balances from over 10,000 non-estate accounts was also abated prematurely.
Summary of Recommendations
The IRS must apply the provisions of the law to help ensure that estate taxes are collected timely and that estates are treated equitably. To accomplish this, the IRS must ensure its records are accurate and that employees are provided guidance needed to adequately evaluate estate tax documents and requests. One action the IRS can take immediately is to reconcile liens in its case files to its information systems to ensure liens are properly recorded and released on estate accounts.
Additionally, guidance is needed to ensure that executors requesting an estate tax installment agreement provide a bond or elect a lien that lasts the full term of the agreement. Management review is also needed to help employees properly evaluate whether requests for extensions of time to pay show adequate reasonable cause. A processing change for both of these types of requests is needed so that required notices are sent to provide estates information about taxpayer rights.
Finally, the IRS needs to review the CSED computer programming to ensure all calculations are accurate, reinstate tax on accounts that have been abated prematurely, and abate the tax on accounts that are past the expiration date.
Managementís Response: A draft of this report was provided to the IRS on February 15, 2000, with a 30 calendar day response period. However, as of the date of this report, IRS management had not provided a formal response to the draft report.