Under a section 6161 extension of time to pay estate tax, a deduction for 100% of the interest calculated on the tax the time for payment of which has been so extended is interrelated with the computation of the estate tax itself. Section 6166 is not involved (but see below). There are several distinct elements with regard to section 6161 computations that must be kept in mind:
- A section 6161 request for an extension of time to pay is generally made on Form 4768.
- Approval of a section 6161 request for an extension of time to pay is granted for one year only.
- A request for an additional extension year must be filed before the previous extension period expires.
- The maximum number of extensions is:
- 10 years maximum (in one-year increments) on the tax shown due on the estate tax return, calculated from the return due date determined without regard to any extensions of time to file (section 6161(a)(2)(A));
- 10 years maximum (in one-year increments) on any part of an installment due under a section 6166 election, calculated from the date the installment payment is due (section 6161(a)(2)(B)); or,
- 4 years maximum (in one-year increments) on any part of an estate tax deficiency, calculated from the date fixed for payment of the deficiency (section 6161(b)(2)).
- All of the interest accrued on unpaid tax and interest is deductible on Schedule J of the estate tax return. This means that the total tax decreases as additional interest accrues and supplemental estate tax returns are filed pursuant to Rev. Proc. 81-27. However, the IRS will not sua sponte reduce the tax - the estate must file a supplemental estate tax return or a claim on Form 843, Claim for Refund or Request for Abatement, to claim the additional interest as a new deduction. (A Form 843 filed before the tax has been fully paid will be treated as a supplemental return rather than as a claim per se. See Rev. Proc. 81-27.)
- Collection Advisory determines whether or not to grant a request for an extension of time to pay. There is no guarantee that they will grant extensions for the maximum of 10 years.
- Collection Advisory might request that collateral (or additional collateral) be posted to protect the government's interest.
|6161 Interrelated Computations Comment 1: An estate with an active section 6166 election can use Form 4768 to request a one-year extension of time to pay an installment that is coming due. This extension can also be extended year-by-year under the section 6161 procedures. However, such a request will trigger an IRS Collection Advisory demand that a section 6165 bond or section 6324A special estate tax lien be posted (if such has not previously been posted). That such a request had to be made indicates the estate is experiencing cash flow problems, which calls into question the estate's ability to meet its future payment obligations under the section 6166 election.|
|6161 Interrelated Computations Comment 2: A section 6161 extension of time to pay is the fall-back provision in the event an estate's section 6166 election is denied or terminated. We have shown that using section 6161 interrelated interest deduction computations over 10 years, when a 10-year section 6166(b)(7) election to extend payment of some $15,000,000 in tax was denied, results in a detriment to the estate of just $246,000 over that 10-year period.|