IRS Estate Tax Liens (Explained)

The process of resolving property disputes after someone’s death can take years or even decades. This is largely due to the probate process and settlement process under state law.

While the IRS is not typically a direct party to these disputes, it does have an interest in the assets involved, particularly in the case of the Federal estate tax, also known as the “death tax.” This tax is levied on the value of assets owned by the decedent at the time of death and is imposed on the transfer of these assets to the estate or heirs.

While there is an exemption that protects smaller estates from incurring estate tax liability, business owners are often hit hardest by the tax. To protect its interest in these cases, the IRS uses a general unfiled estate tax lien, but this system is not always efficient. The IRS may also impose a special estate tax lien on specific assets. The difference between the two types of liens is not all that clear.

The Federal Estate Tax

The Federal estate tax is often referred to as the death tax.  It is imposed on the value of assets the decedent owns at the time of death.  The tax itself is imposed on the transfer of the assets from the decedent to his estate or heirs.  

There is a generous exemption that allows modest estates to not incur an estate tax.  Congress changes the upper limit of this exemption every few years.   As it currently stands, very few taxpayers end up with a gross estate that has a large enough value to incur an estate tax liability. 

The estate tax primarily impacts business owners.  Recognizing this, Congress has provided relief to business owners whose estates (i.e., whose businesses) are not able to immediately pay the full amount of their estate tax liability.  Specifically, Congress has provided that executors for business owners can elect to pay the estate’s estate tax liability over a number of years if the primary asset of the estate is an interest in a closely-held business.

The IRS’s Estate Tax Lien

The general estate tax lien arises when the estate does not pay an estate tax liability that is due and owing. This tax lien does not have to be filed or perfected in order to be valid.  It attaches to all property that is included in the decedent’s gross estate. 

But it does not reach all of the decedent’s property, such as property held in trust.  The general estate tax lien does not attach to property that is outside of the decedent’s gross estate or to assets that are included in the decedent’s gross estate that are expended for court-approved estate expenses. The IRS’s lien may be avoided with some transactions, such as a contract for deed for the sale of real estate.

The IRS’s Special Estate Tax Lien

This brings us to the IRS special estate tax lien.  The IRS imposes a Section 6324A special estate tax lien in these cases.

This type of special estate tax lien is only valid with regard to the specific assets agreed upon by the executor and the IRS, which usually consists of a security interest in the business entity.  In many cases, this is the only substantial estate asset. The special estate tax lien must generally be filed or otherwise perfected to be valid against third parties.

Once a special estate tax lien is filed, there is some uncertainty with regard to whether the general estate tax lien is extinguished. In a footnote in Chief Counsel Advice Memorandum 20070801F the IRS Office of Chief Counsel explains that “The Service’s position is that the general estate tax lien continues to attach all estate property except the property subject to the section 6324A [special estate tax] lien.” This may or may not be correct (The IRS attorneys also admit that this issue has never been directly decided by the courts).

Section 6324A(d)(4) does provide that “If there is a [special estate tax] lien ” on any property with respect to any estate, there shall not be any [general estate tax] lien ” on such property with respect to the same estate.” This does not explain whether the general estate tax lien survives the filing of a special estate tax lien.

The Perfected Special Tax Lien

As a practical matter, a filed or perfected special tax lien has the potential to mislead third parties who search the applicable records if the general estate tax lien is not extinguished by the filing of the special estate tax lien.

Even though the special estate tax lien identifies the property that the lien attaches to, third parties may assume that the estate has resolved or fully addressed its estate tax obligations via this special estate tax lien and/or that the IRS does not intend to pursue any estate assets other than those listed in the special estate tax lien.

The IRS could easily remedy this situation by filing the general estate tax lien at the time that it files the special tax lien. The IRS should be required to make this additional filing given that it is the party who is in the best position to remedy the situation. The IRS should not be entitled to reap any benefits of an unfiled general estate tax lien if the IRS fails to make this filing.

An Issue for the Future?

At some point, a taxpayer is going to litigate this tax issue, and there is some chance that the courts may not agree with the IRS’ current position.

This type of estate tax collection issue has not received as much fanfare as estate tax repeal; however, this type of tax collection issue can go a long way in reducing the impact, and ultimately the perceived injustice, of the federal estate tax regime. If opponents of the estate tax cannot secure a full repeal of the federal estate tax, they might be able to modify the tax collection rules to achieve their aims.