In June of 2016, the Internal Revenue Service (IRS) changed its procedure for granting discharges of estate tax liens and implemented centralized handling of applications for discharge. Historically, Specialty Examination Estate & Gift and Specialty Collection Advisory (Advisory) shared the responsibility for processing applications for discharge of the estate tax lien, depending on the circumstances. In June 2016, the responsibility for working all applications for discharge of the estate tax lien was transferred to Advisory and centralized in the Estate Tax Lien Group. Effective April 5, 2017, the IRS issued additional internal guidance to Advisory, “Interim Guidance for Responsibility to Process all Requests for Discharge of the Estate Tax Lien.”
Upon an individual’s death, an estate tax lien immediately arises and attaches to all of the property included in the decedent’s gross estate, whether or not such property is part of the probate estate. The lien is in effect for 10 years from the date of death and cannot be extended.
No assessment, notice, or demand for payment are necessary to create the estate tax lien, and it need not be recorded to be enforced. It attaches at the time of the decedent’s death, before the tax is determined, and is security for any estate taxes that may be determined to be due.
Prior to selling real property subject to the estate tax lien, an estate should file a request for discharge of the estate tax lien on Form 4422, Application for Certificate Discharging Property Subject to Estate Tax Lien. The Service’s authority to issue a certificate of discharge related to the estate tax lien is governed by Internal Revenue Code section 6325(c). The primary purpose of the estate tax lien discharge is not to evidence payment or satisfaction of the estate tax, but to permit the transfer of property free from the lien in case it is necessary to clear title. The estate tax will be considered fully satisfied only when an investigation has been completed and payment of the tax, including any deficiency that has been determined, has been made.
Prior to the implementation of the new system, the release process was fairly simple. The closing or estate attorney would complete Form 4422, attach the relevant closing documents, and submit to the IRS, which would issue a discharge thereafter. At this point, the sale of the real property would continue as expected. Because of concerns surrounding subsequent collection of taxes from estates that were issued discharges, the Service revised its procedure, effective June 1, 2016.
The post-June 1, 2016 procedure gives the estate three methods to get the discharge:
- Submit the Form 4422 and closing documents to the IRS, and escrow the net proceeds of the sale with an agent and in an amount acceptable to the Service; or
- Deposit the entire net proceeds of the sale with the Service, until there is a closing letter on the audit; or
- Dispense with the escrow if a return is accepted as filed in a non-taxable estate.
The April 5 guidance provides “[i]f the Form 4422 shows an estimated estate tax greater than the net proceeds from the property being sold, and no estimated payment has been made, then the net proceeds should be paid or escrowed before granting the discharge…. If the Form 4422 shows an estimated estate tax liability, and the estate has filed an extension to file the tax estate tax return (Form 4768) and paid the full estimated tax liability, then a discharge without an escrow may be appropriate.” If an estate is non-taxable, no discharge is necessary, and the IRS can simply issue a letter (Letter 1352) to that effect. The guidance points reviewers to criteria set forth under Internal Revenue Code section 6325(b) in reviewing and considering discharge requests.