Notice 2020-23 Covid-19 Automatic Extension - Late 6166 Installment Payment With 6166(g)(3) and 6651(a)(2) Penalties - Computation Example 2



Variation on the Facts in Computation Example 1

Additional Facts: 

  • Although the automatically extended due date for payment of the May-25-2020 installment was Jul-15-2020, the estate did not pay it.
  • The estate did not timely file Form 4768 to request an extension of time to pay the installment, which would have been accomplished by checking the last checkbox under Part III, Extension of Time to Pay (Section 6161), on a Form 4768 filed on or before the Jul-15-2020 automatically extended installment due date.
  • On Aug-25-2020 the first notice regarding a potential section 6166(g)(3) acceleration was sent to the estate together with a demand for payment of the installment, penalties, and interest, by Sep-10-2020. IRM provides that such notice must be sent 45 days after the missed installment due date.
  • The estate paid the installment due Jul-15-2020 on Sep-20-2020, but not the penalties and interest.
  • On Sep-30-2020 IRS assessed the following penalty and interest amounts and sent a Notice and Demand for payment of the following penalties and interest by Oct-13-2020:
 399,512.58 Section 6166(g)(3) late payment penalty of 15% of the total amount due Jul-15-2020
   34,373.01 Section 6651(a)(2) failure to pay penalty of 1.5% computed on the tax, but not interest, due Jul-15-2020
   14,694.27 Section 6621 interest on the total amount due Jul-15-2020, computed from Jul-16-2020 through Sep-20-2020, the date the installment payment was received, plus interest on interest computed from Sep-21-2020 through Oct-13-2020, the date on which payment of both penalties and all section 6621 interest was due in the IRS demand for payment. (Interest was not assessed on either the section 6166(g)(3) penalty or the section 6651(a)(2) penalty.)
 448,579.86 Total payment of penalties and interest demanded by Oct-13-2020
  • In response to the Sep-30-2020 IRS demand for payment, the estate paid $ 448,579.86 penalties and interest on Oct-06-2020.
  • Because the entire installment due Jul-15-2020 and all penalties and interest due pursuant to section 6166(g)(3) were paid within 6 months of the installment due date, the section 6166 installment election continues undisturbed.
  • Details are shown below.


Section 6166(g)(3) Penalty Computation
 2,291,533.86 Tax due May-25-2020, extended to Jul-15-2020
   371,883.32 Interest due May-25-2020, extended to Jul-15-2020
 2,663,417.18 Total installment due May-25-2020, extended to Jul-15-2020
 2,663,417.18 Payment received by IRS on Sep-20-2020
Sep-10-2020 Date payment of penalty and interest was due in IRS billing notice sent to the estate on Aug-25-2020
Sep-20-2020 Date payment was received by IRS.
3 Number of months the 6166(g)(3) penalty accrues at 5% per month (see the Number of Months computation below)
Computing the Section 6166(g)(3) Penalty 
 2,663,417.18 Total installment due Jul-15-2020
15 % Section 6166(g)(3) penalty rate
   399,512.58 Section 6166(g)(3) penalty due Oct-13-2020
Determining the Number of Months the 6166(g)(3) Penalty Accrues @ 5%
2020 9 20 Date payment was received, less
2020 7 15 Date the section 6166 installment was due
0 2 5 Number of whole months and fraction of additional month
  3   Number of months the section 6166(g)(3) penalty accrues at 5% per month (maximum of 6 months) and the number of months the section 6651(a)(2) penalty accrues at 0.5% per month  (maximum of 50 months).
Computing the Section 6651(a)(2) Penalty 
 2,291,533.86 Total tax installment due Jul-15-2020
1.5 % Section 6651(a)(2) penalty rate
   34,373.01 Section 6651(a)(2) penalty due Oct-13-2020
Computing the Section 6621 Regular Rate Interest 
 2,663,417.18 Total installment due Jul-15-2020
.05506684% Section 6621 interest rate for the 67 days from Jul-15-2020 through Sep-20-2020
   14,666.60 Section 6621 interest on the entire installment from Jul-15-2020 through Sep-20-2020
.01886946% Section 6621 interest rate for the 23 days from Sep-20-2020 through the due date of Oct-13-2020
          27.67 Additional section 6621 interest on the interest due Sep-20-2020 to the payment date of Oct-13-2020 
   14,694.27 Total section 6621 interest due Oct-13-2020

Notice 2020-23 Computation Example 2, Comment 1:  Interest computed under section 6621 is not governed by section 2053(c)(1)(D), which applies only to interest computed under section 6601. Accordingly, the total section 6621 interest due Oct-13-2020 is allowable as a new estate tax administration expense deduction on Schedule J, and the estate can file a supplemental estate tax return to recompute the estate tax and all section 6166 interest and installment payments from the return due date forward.

Computing the Total Amount Due Oct-13-2020 
  399,512.58 Section 6166(g)(3) penalty - 3 months @ 5% per month
    34,373.01 Section 6651(a)(2) penalty - 3 months @ 0.5% per month
    14,694.27 Section 6621 interest
  448,579.86 Total amount due Oct-13-2020

Notice 2020-23 Computation Example 2, Comment 2:  The section 6166(g)(3) and 6651(a)(2) penalties, and the section 6621 interest, are considered part of the installment that was due Jul-15-2020. Failure to pay any part of this amount would constitute a failure to pay the installment due Jul-15-2020, which would cause acceleration under section 6166(g)(3) if not paid within 6 months of Jul-15-2020.

In order for such acceleration to occur, however, the IRS must adhere to the section 6166(g)(3) notice requirements in the Regulations. In the past there were instances where, for whatever reasons, IRS had not completed the notice requirements for several years. The section 6166 special interest rates on the unpaid deferred tax continued to accrue until the final procedural step had been taken by IRS, and only then was the installment election able to be terminated for failure to pay an installment.

Notice 2020-23 Computation Example 2, Comment 3:   As shown above, the section 6166(g)(3) penalty is 5% per month of the total amount due on the installment due date. The maximum penalty is 30%, or 6 months at 5% per month. If an estate pays the installment, penalties, and interest within 6 months of the installment due date, the section 6166 election is preserved.

However, if an estate fails to pay the penalties and interest (and the installment itself) within 6 months, the section 6166 election will be terminated under section 6166(g)(3) and the unpaid portion of the tax payable in installments shall be paid upon notice and demand. 

When the installment election is thereby terminated, the previously assessed section 6166(g)(3) penalties will automatically be abated by IRS. Such penalties are no longer due from the estate because the section 6166 election has been terminated. A section 6166(g)(3) penalty is payable only if the section 6166 installment election is preserved.