Extensions of Time to Pay Estate Tax Under Section 6161

Estate tax is due nine months after death under IRC 6151. That date does not move when the Form 706 is extended. An estate that files Form 4768 for more time to file still owes the tax at nine months, and interest and late-payment penalties start if it does not pay.

Some estates simply cannot pay on that schedule without serious damage. The assets are real estate that needs time to sell properly, receivables that will come in over years, or claims tied up in litigation. For those estates, IRC 6161 lets the executor ask for an extension of time to pay.

Two kinds of extension

Up to 12 months. IRC 6161(a)(1) allows the IRS to extend the time for payment of estate tax for a reasonable period not to exceed 12 months. Treas. Reg. 20.6161-1(a)(1) frames this as an extension based on reasonable cause, granted after an examination of all the facts and circumstances.

Up to 10 years. IRC 6161(a)(2) allows the IRS, for reasonable cause, to extend payment of any part of the estate tax, or of a section 6166 installment, for a reasonable period not exceeding 10 years. Under the regulation, each extension is generally for no more than one year at a time, with the total not exceeding 10 years from the original due date. The executor must request each renewal before the prior extension expires.

The regulation's paragraph on longer extensions still uses older "undue hardship" language from before the statute was amended. The statute now says reasonable cause. In practice, the IRS looks at the same kinds of facts, and a strong request explains both why payment now is impractical and why the estate is not simply choosing convenience.

What reasonable cause looks like

Treas. Reg. 20.6161-1(a)(1) gives four examples that are still the best guide to what the IRS will accept:

1. Assets the executor cannot reach yet. The estate has enough liquid assets, but they are spread across jurisdictions and are not yet under the executor's control despite due diligence.
2. Future payment rights. A substantial part of the estate is rights to future payments, such as annuities, royalties, contingent fees or receivables, and the estate cannot borrow against them except on terms that would cause loss.
3. Assets tied up in litigation. The estate has a claim to substantial assets that cannot be collected without litigation, so the size of the gross estate cannot be determined when the tax is due.
4. Insufficient funds for tax, family and creditors. The estate lacks funds, without borrowing at above-market rates, to pay the tax, provide a reasonable allowance for the surviving spouse and dependent children, and satisfy claims that are due, and the executor has made a reasonable effort to convert assets to cash.

The regulation's hardship examples are also instructive. One describes a farm or closely held business that is a significant part of the estate but does not meet the section 6166 percentage test. Another describes assets that could only be sold at a sacrifice price or in a depressed market.

The regulation is equally clear about what does not qualify. A general statement of hardship is not enough. A sale of property at its current fair market value, where a market exists, is not ordinarily considered a hardship. Wanting to keep the beach house is not reasonable cause.

How to request it

The request is made on Part III of Form 4768, the same form used to extend the time to file. Treas. Reg. 20.6161-1(b) requires that the application:

• Be in writing.
• State the period of extension requested.
• Include a declaration that it is made under penalties of perjury.
• Include a statement of the reasonable cause, in detail.

Timing is strict. The regulation says an application will not be considered unless it is made on or before the date fixed for payment. A request filed the day after the nine-month date is too late. Additional extensions must be requested before the current extension expires.

The IRS aims to grant, deny or tentatively grant the request within 30 days if possible. If it is denied, the regulation provides for a written appeal within 10 days after the denial is mailed.

Attach support. Appraisals showing illiquid assets, a schedule of cash on hand versus tax due, listing agreements for real estate, correspondence with lenders showing borrowing terms, and pleadings in pending litigation all make the request concrete.

Interest, penalties and security

An extension does not stop interest. Treas. Reg. 20.6161-1(c)(2) says so directly. The estate pays interest under IRC 6601 on the extended amount from the original due date until paid. Unlike section 6166, there is no special 2 percent rate.

What the extension does avoid is the failure-to-pay penalty under IRC 6651(a)(2) on the extended amount, which can otherwise run to 25 percent.

The IRS can require security under IRC 6165, typically a bond of up to double the amount of tax extended. That requirement is discretionary, and the IRS considers the estate's circumstances.

And the extension to pay does not extend the time to file. Treas. Reg. 20.6161-1(c)(3) reminds executors that the return is still due on time. See Form 706 deadlines and extensions.

A Sarasota example

Picture an estate whose largest asset is a commercial building in downtown Sarasota, plus a modest brokerage account. The estate tax due at nine months is more than the brokerage account holds. The building is under a long-term lease and can be sold, but a sale marketed properly will take most of a year.

A well-supported 6161 request would show the cash available, the tax due, the steps already taken to market the building, the broker's realistic timeline, and why a quick sale would bring less than fair market value. It would ask for a specific period, pay what the estate can at nine months, and commit to paying the balance from the sale proceeds.

6161 or 6166?

If the estate is built around a closely held business that exceeds 35 percent of the adjusted gross estate, section 6166 is usually the stronger tool. It is an election, not a discretionary request, and it carries a favorable interest rate on part of the tax.

Section 6161 fills the gaps: estates that do not meet the 6166 percentage test, estates whose illiquidity is temporary, and estates that need extra time on a 6166 installment. The regulation also provides that if an executor files a 6166 election in the mistaken belief the estate qualifies, the executor can ask that it be treated as a timely 6161 application.

Protecting the executor

An executor operating under an extension is managing an estate that owes the federal government money. Every distribution and every payment to other creditors during that period should be checked against the federal priority statute. And remember that the estate tax lien still sits on the gross estate until the tax is paid.

When the estate finally sells the assets that justified the extension, pay the IRS from the proceeds before distributing anything. That is the deal you asked for.

If the estate simply cannot pay

Some estates are not illiquid. They are insolvent, or will be once the tax is paid. If that is where things are heading, the options change: negotiating with the IRS over collection, and in limited cases an offer in compromise for an estate. Those are harder roads, and the IRS will want to see that the estate pursued every reasonable way to pay first.

If the nine-month payment date is approaching and the estate does not have the cash, call (813) 229-7100. Let's talk.