Source: http://www.irs.gov/irm/part5/irm_05-006-001.html
Timestamp: 2013-06-19 15:30:08
Document Index: 436657297

Matched Legal Cases: ['art 5', 'art 225', '§ 6166', '§ 6324', '§ 6166', 'arts 6', 'arts 2', 'art 2', 'art 2', 'art 2', 'art 2', 'art 3', 'arts 4', 'art 5', 'art 4', 'art 1']

Internal Revenue Manual - 5.6.1 Collateral Agreements and Security Type Collateral
Chapter 6. Collateral Agreements
Section 1. Collateral Agreements and Security Type Collateral
5.6.1 Collateral Agreements and Security Type Collateral
Types of Acceptable Securities
Initial Processing (Overview)
Initial Collection Actions
Collateral Agreement and Other Acquired Property Serial Numbers 5.6.1.7
Preparing Form 2276, Collateral Deposit Record
IDRS Input
International Collateral Agreements
(1) This transmits a revision to Part 5, Collection, Chapter 6, Collaterals, Section 1 "Agreements and Security Type Collateral
(1) 5.6.1.2.3 expanded to provide a more detailed discussion of collateral situations involving estate tax deferred payments
and Advisory actions.
(2) 5.6.1.3 moved to 5.6.1.9 and subsequent sections renumbered.
(3) Table in renumbered 5.6.1.5 converted to text.
(4) Revised 5.6.1.6 to include timeframe for establishing control in ICS. This change previously negotiated under Memorandum of Understanding (MOU) for IRM Changes to Advisory Casework and Processes, dated December 22, 2009 and amended
(5) Moved text in renumbered 5.6.1.6 (4) to 5.6.1(3)(a) subsection and subsequent text renumbered accordingly.
(6) Added text to renumbered 5.6.1.7 (2) to discuss use of alpha codes in international collateral situations.
(7) 5.6.1.9 expanded to provide international collateral procedures for Expatriate Tax, Captive Insurance, Foreign Investment
in Real property Tax Act (FIRPTA), and Federal Excise Insurance Tax (FET) cases previously contained in informal memoranda.
(8) Updated references to Form 2276, Collateral Deposit Record, based on previous form revisions.
(9) Editorial corrections were made throughout document to correct punctuation and update organizational names.
This supersedes IRM 5.6.1 dated 07-01-2006.
Small Business/Self Employed Collection Employees
Scott D. Reisher, Director, Collection Policy
5.6.1.1 (10-25-2011)Collateral Agreements
A collateral agreement is executed by the taxpayer and "collateral security"
ensures that the taxpayer performs the terms of the agreement. A collateral agreement is a pledge, guaranteed by security,
for the performance of a certain act, i.e., payment of a delinquency or the filing of a return. A collateral agreement does
not compromise the tax liability and should not be confused with collateral agreements in the context of offers in compromise.
See IRM 5.8.6.1, Overview.
Read Internal Revenue Code (IRC) section 7101 and Treas. Reg. section 301.7101–1 for a discussion of situations that involve
the use of bonds and by extension other forms of collateral security.
Consider the following when contemplating a collateral agreement: The risks of not filing a lien since collateral agreements do not offer the same protection to the Service as a Notice of
Federal Tax Lien (NFTL).
The possibility of the taxpayer filing for bankruptcy. The possibility of competing lien priorities.
The possibility of state law ramifications when contemplating taking a deed of trust. Contact Advisory for guidance.
The lack of standards and concern for security and marketability for "other acceptable collateral."
Contact Advisory for guidance.
For United States Saving Bonds, endorsement or execution of the bond as one of the conditions.
If Collection is contemplating a collateral agreement for non-assessed taxes, Advisory will consult with Area Counsel.
Requests for collateral agreements must be prepared in triplicate by the taxpayer, or the taxpayer's representative, and must
include the following information: Identification of the parties (taxpayer, IRS, and/or third party, if applicable), Aggregate tax liability,
Method by which taxpayer proposes to pay the tax liability,
Specific dates outlining when required actions will be taken.
The taxpayer or the authorized representative must be advised that failure to keep the terms of the collateral agreement will
result in the IRS taking the necessary action to liquidate the collateral. A collateral agreement creates an independent remedy,
separate from one to collect a tax, which may not be subject to the statute of limitations on collection.
The taxpayer's proposal for payment supported by a properly executed power of attorney or by endorsement of the securities.
Provisions for the disposition of any coupons maturing while the security is in the possession of the Government.
A condition that the IRS intends to offset any refunds to the delinquent account covered by the agreement until accounts are
paid in full or otherwise satisfied.
Provision that the taxpayer must remain current on filing and must not incur any further delinquencies during the term of
the collateral agreement. A term that the Service has a unilateral right to liquidate the collateral upon the failure to keep the terms of the agreement.
5.6.1.2 (10-25-2011)Types of Acceptable Securities
The value of the collateral must be sufficient to protect the interest of the Government throughout the life of the agreement.
Consideration should be given to possible market fluctuations. Collateral security includes, but is not limited to, the following:
Marketable stocks or bonds of recognized stability, Other corporate stocks or bonds supported by statements of financial condition reflecting the actual value of the security,
Securities issued by any state, territory, or political subdivision thereof,
Other forms of securities acceptable to the Area Director after consultation with Advisory.
Since collateral security may be negotiable while in the possession of any person, precautionary measures must be taken to
safeguard the collateral. See IRM 10.2.13, Information Protection.
5.6.1.2.1 (10-25-2011)Bonds
A bond for the purpose of securing payment of internal revenue taxes is collateral security offered by the taxpayer, his/her
representative or a third party, which satisfies the provisions of IRC section 7101 and Treas. Reg. section 301–7101–1.
Treas. Reg. section 7101–1(b)(1) and (2) specify the kinds of security acceptable for securing payment of internal revenue
taxes as provided in Title 6, Section 15 of the United States Code. Treasury Department Circular No. 570, Companies Holding Certificates of Authority as Acceptable Sureties on Federal Bonds,
and as Acceptable Reinsuring Companies., periodically lists the companies certified by the Secretary of the Treasury as acceptable
sureties on Federal bonds. This list also shows the areas in which the companies are licensed to transact business and the
underwriting limitations applicable to each company. Note:
Treasury Department Circular No. 570 may be found at http://fms.treas.gov/c570/index.html A bond executed by a surety not holding a certificate of authority approved by the Secretary of the Treasury shall be accompanied
by financial statements of the surety or sureties. The taxpayer's proposal to pay will be submitted with the bond.
A bond is considered executed with satisfactory surety if it is secured by bonds or notes of the United States as provided
in Treasury Circular No. 154, 31 CFR Part 225. Collection Field function (CFf) should contact Area Counsel, through Advisory,
if you have any questions about whether the bonds or notes constitute satisfactory surety Treas. Reg. Sec. 301.7101–1(b)(2) allows the Area Director to consider a bond as being executed with satisfactory security,
in lieu of execution by an approved surety company or in lieu of being secured by bonds or notes of the United States, if
it is: Executed by a corporate surety (other than a surety company), so long as the corporate surety establishes that it is within
its powers to act as a surety for another;
Executed by two or more individual sureties, if each meet the conditions of Treas. Reg. section 301.7101(b)(3). These provisions
indicate that each must reside in the state in which the principal place of business or legal residence of the primary obligor
lies; that each have property subject to execution of a fair market value equal to at least the penalty of the bond; that
all real property offered as security must be located in the state of the primary obligor's principal place of business or
legal residence; the surety must agree not to mortgage or otherwise encumber any property offered as security while the bond
remains in effect (absent securing the Area Director's permission); and he/she must file an annual affidavit, on a form prescribed
by the Secretary, describing the adequacy of his/her security;
Secured by a mortgage on real estate or personal property;
Secured by a certified, cashier's or treasurer's check drawn on a bank or trust company incorporated under the laws of the
United States, a state, territory or possession of the United States or by the United States postal, bank, express or telegraph
Secured by corporate bonds, stocks or by State or local Governmental bonds; or
Secured by any other acceptable collateral.
Security must be submitted with a suitable bond agreement executed by the taxpayer and any third party which may be guaranteeing
Bond(s) executed with surety should be submitted in a format acceptable to the Area Director. Consult with Advisory for acceptable
formats. Ascertain from Area Counsel, through Advisory, whether a time limitation for the validity of the types of checks below are
provided by state laws in his/her respective state. If there is a bond agreement secured by cashier's, treasurer's or certified checks and there are. . .
Then the validity of the check is . . .
state statutes relating to the period of limitations
not extended past what is provided by state law.
no state statutes relating to the period of limitations
is limited to one year from the date the check is issued.
For corporate stocks and/or bonds, especially unlisted securities: Ascertain to the extent possible that market values will not fluctuate below levels sufficient to guarantee payment of the
taxes. Accept such collateral only when current market values are well above the amount of the outstanding taxes being secured.
Do not accept "Restricted"
or "Letter"
stock, which cannot be sold without a registration certificate from the Securities and Exchange Commission.
5.6.1.2.2 (10-25-2011)Fuel Tax Bonds
Persons required to be registered for purposes of the federal excise tax on taxable fuel imposed by IRC section 4081 may
be required, as a condition of registration, to furnish a bond and agree to the imposition of a lien. See IRC section 4101
for a more detailed discussion of the fuel tax bonds.
Application for Registration (for certain excise tax activities) is made on Form 637, Application for Registration (For Certain Excise Tax Activities). Refer to IRM 4.24.2 for procedures and circumstances when the agent may recommend to the Area Director that a bond be required
as a condition of registration.
Refer to IRC section 4101(b) and Manufacturers and Retailers Excise Tax Regulations 48.4101-1(j) for the form and amount of
See Treas. Reg. Sec. 48.4081-3(c)(2)(iv) for rules relating to posting of customs bonds for entries of taxable fuel.
5.6.1.2.3 (10-25-2011)Estate Tax Bonds and Other Collateral
Advisory shall determine whether to require a bond or, in the alternative, suggest to the Executor, or other Estate representative,
that a 6324A lien would be acceptable security for the deferred payment of estate tax. See IRM 5.5.6.2.
Advisory must first determine whether any security for extension of time to pay estate taxes is necessary based on the facts
and circumstances of each estate. See 5.5.8.5.1, Advisory Bond/Lien Determinations for Estate Tax Deferred Under IRC § 6166.
Bonds or other types of collateral accepted by Advisory from estates securing extensions of time to pay estate taxes under
IRC section 6161,IRC section 6163 and IRC section 6166 will be maintained for safekeeping by the Advisory Estate Tax Group.
Bonds and other types of collateral accepted by Estate & Gift from estates securing contingent estate tax liabilities under
IRC section 2056A relating to Qualified Domestic Trusts (QDOTs) will also be maintained for safekeeping by the Advisory estate
The Service cannot accept a Letter of Credit (LOC) in lieu of a bond when a decedent's estate elects under IRC section 6166.
In the case of any proposed bond, Advisory will consult with Area Counsel for drafting (if needed) and review of the bond
Area Counsel will also be consulted when unusual assets are being considered as security on the lien agreement, such as art
or collectibles, to recommend appropriate actions to secure the collateral.
Stock offered as collateral may be accepted only when the statutory requirements of IRC section 6324A(b)(1) and (2) are met.
The stock can be expected to survive the deferral period;
The collateral must be adequately identified in the agreement and can be submitted via Form 13925, IRC Section 6324A Lien Agreement Form; SeeIRM 5.5.8.5, Special Lien Under IRC § 6324A for Estate Tax Deferred Under IRC § 6166 ;
The value of the stock must be sufficient to fully satisfy the estate tax liability plus the required interest amount.
The Service cannot reject closely held stock offered as collateral for the sole reason that it is closely held and hard to
value. Consult with Area Counsel, through Advisory, on valuation issues.
If stock certificates are pledged as collateral for the lien, the Advisory employee will secure the original stock certificates
and store in an approved safe. This will prevent the sale of such certificates to third parties without regard for the 6324A
The Service will file a NFTL,Form 668-J, for the special estate tax lien on the stock. Stock, in most instances, will be considered
personal property under state law. With respect to personal property, a lien must be filed in the office designated by state
law in which the personal property is located.
Follow procedures in IRM 5.6.1.7 for the preparation of Form 2276, Collateral Deposit Record. The stock certificates will be shown as "Safekeeping"
reflecting a "zero value"
for RACS purposes.
5.6.1.2.4 (10-25-2011)Mortgages
When circumstances indicate a need to extend the period for collection of tax, the Service will normally have the Department
of Justice reduce the tax claim to judgment. In rare situations, to extend the time period in which the tax may be paid or
to obtain a lien on a piece of property to which the federal tax lien never attached, the Service may obtain a consensual
lien (mortgage or deed of trust) from the taxpayer.
In all situations where Service personnel contemplate obtaining a consensual lien, Area Counsel, through Advisory, should
be contacted as soon as possible and their approval secured.
The advice and approval of Area Counsel for any anticipated consensual lien are vital. Service personnel must recognize that
state law determines if the consensual lien exists and if the lien will be enforceable. Failure to comply with state law may
make the consensual lien invalid or unenforceable.
These considerations limit the use of the consensual lien to rare circumstances. It may be appropriate when the federal tax
lien does not attach to the property in question. For example, an assessment exists against only one spouse and the federal
tax lien does not attach to real property held by the non-liable spouse. To avoid collection from property that the lien encumbers,
the couple may decide to give the Service a consensual lien on property held by the non-liable spouse.
The Service should never obtain a consensual lien in lieu of filing a notice of federal tax lien and reducing the tax claim
to judgment or requiring that the taxpayer post a bond.
The facts and circumstances of a particular case will determine the duration of the consensual lien. Area Counsel must specifically
advise the Service concerning the state law issues regarding the duration of the lien and its refiling.
The mortgage or deed of trust must be prepared by the taxpayer's counsel. The advice of private counsel negates later claims
that the taxpayer did not know or understand his/her rights. The instrument must be executed in favor of the United States,
as mortgagee, and should contain a clause expressly providing that it may be released by the Area Director, Collection, Internal
Revenue Service, for the geographic area in which the mortgage is recorded. Do not include the name of the official. All fees
in connection with the instrument, including recording and releasing fees, must be paid directly by the mortgagor.
Whenever possible, the instrument should provide that the taxpayer make payments over the life of the mortgage, thereby reducing
Revenue Officers must ascertain whether there are any senior lienholders on the property being offered as collateral. Specific
information obtained on any senior liens should include the current status of the lien interest and the potential for default
by the taxpayer, which would then force the Service to either redeem the property or lose its interest in the property held
The Collection Group Manager receiving the mortgage/deed of trust will immediately contact the Collateral Advisor, for their
review of the instrument and all related documents. If the Group Manager approves of the mortgage/deed of trust, these documents
will be forwarded to the Advisory Group Manager for review and forwarding to Area Counsel for approval.
If the Advisory Group Manager and Area Counsel approve the mortgage/deed of trust, the instrument will be returned to the
initiating Collection Group Managers to be filed as provided under local law. 5.6.1.2.5 (10-25-2011)Escrow Arrangements
Explore escrow arrangements when prompt action is required to safeguard the Government's interests, to obtain cash security
on which the tax lien has not attached, and/or allow the taxpayer to remain in business during the time required for: Judicial review of his/her case,
Readjustment of his/her affairs,
Releasing a levy.
Make certain that the: Escrow agent is a disinterested and reliable person, Government's interest will be protected at all times, Costs in connection with the securing of an escrow agent and other related expenses will be paid directly by the taxpayer.
Provide the following information to the Advisory Group Manager where an escrow agreement is to be executed: Name, identification number and address of taxpayer, Name and address of escrow agent,
Taxpayer's business and location,
Account information (type of tax, period, balance, period remaining under the collection statute, etc.),
Condition of the arrangement,
5.6.1.2.6 (10-25-2011)Letter of Credit
A Letter of Credit (LOC) allows the taxpayer to remain in business and protects the Government's interest and is acceptable
for: Forbearance in filing Notice of Federal Tax Lien, Releasing a levy,
Deposit on redemption.
Cases arising under IRC section 6165 and IRC section 6166
As indicated in IRM 5.6.1.2.3(5), Letters of Credit cannot be furnished in lieu of the bond required by IRC section 6166.
Previously, this prohibition did not extend to cases arising under IRC section 6165 where the letter of credit was determined
as appropriate substitute for bond.
IRC section 7101(1) further states that whenever a bond is required, it shall be in such form with such surety as prescribed
by regulation. Letters of credit do not meet the surety criteria set forth in Treas. Reg. section 301.7101-1(b) for any case
where a bond is required.
In cases where a letter of credit is proposed in lieu of bond, the proponent should be advised that the application is not
However, in accepted cases where a letter of credit has been substituted for a bond conforming to previous IRM procedures,
the acceptance should not be revoked provided the proponent performs in accordance with the agreement.
Consult with Area Counsel, through Advisory, regarding the terms, conditions and duration of the instrument.
Costs in connection with securing and issuing the instrument and other related expenses must be paid by the taxpayer.
To adequately protect the interest of the United States, the letter of credit must: Specify the United States, by and through the Area Director of Internal Revenue, as beneficiary of the credit established
under the Letter.
Be irrevocable, meaning that it cannot be revoked prior to its expiration date without the consent of the issuing institution,
the taxpayer(s), and the Area Director.
Be "clean,"
meaning that no document of title is required to be presented by the Area Director in order to receive payment under the
When a Letter of Credit is being considered, submit the following data to Advisory: Name, identification number and address of taxpayer, Name and address of proposed issuer of the Letter of Credit,
Taxpayer's business and location if different from that given in "a"
Note: The date stipulated for payment will not extend beyond six months prior to the expiration of the collection statute.
5.6.1.3 (10-25-2011)Initial Processing (Overview)
The following subsections explain the procedures for the processing of collateral agreements and Form 2276, Collateral Deposit Record.
5.6.1.4 (10-25-2011)Initial Collection Actions
When acceptance of collateral security is in the best interest of the Government, the responsible collection employee will
negotiate the terms of the collateral agreement and the nature of the collateral with the taxpayer or representative. Ensure that the taxpayer or representative completes the collateral agreement in triplicate. Electronic submissions may be
accepted and should be signed digitally with a secure signature of the taxpayer and/or representative.
When specific questions arise concerning preparation of the collateral agreement, obtain assistance from Advisory and Area
Prepare a transmittal memorandum in triplicate furnishing pertinent facts and a recommendation as to whether the offered collateral
and the terms of the collateral agreement have merit for consideration. Contact local Advisory for questions concerning the
transmittal memorandum format. Electronic submissions are acceptable.
The collateral agreement and transmittal memorandum should be submitted to the collection employee's immediate supervisor
for review and subsequent approval. Digital signature(s) of approving official(s) are acceptable.
The approved collateral agreement and transmittal memorandum should then be forwarded to Advisory for further review and approval.
Safeguard collateral at all times. Refer to IRM 10.2.15, Minimum Protection Standards (MPS) for specific guidance regarding safekeeping requirements.
SB/SE Delegation Order 5.3 (Rev. 1) contains information regarding approval authority. Collateral agreements should always
be reviewed and approved by Advisory.
5.6.1.5 (10-25-2011)Advisory Actions
Advisory will provide assistance to revenue officers and other Service personnel in developing collateral agreements and by
reviewing the collateral security for accuracy, form and content.
Advisory will open a control on ICS no later than seven (7) calendar days after receipt in the group of the collateral agreement
using the appropriate action code (184 - Collateral, 188 - Captive Insurance, and 189 - Other International)
If the proposed collateral agreement is acceptable, the Advisory employee will:
Forward to the Advisory Group Manager for approval. Digital signature(s) of approving official(s) are acceptable.
Request IDRS input upon approval as described in IRM 5.6.1.8.
If the proposed collateral agreement is not in conformance, forward to Area Counsel for an opinion.
5.6.1.6 (10-25-2011)Collateral Agreement and Other Acquired Property Serial Numbers Revenue officers will contact Advisory for assignment of a unique serial number.
The serial number will be used on Form 2276, Collateral Deposit Record.
Serial numbers will be used to identify both collateral agreements and "other"
acquired property agreements.
"Other acquired property"
is any property deeded to, surrendered to, or otherwise acquired by the Internal Revenue Service (IRS) by means other
than IRS seizure or sale. Typically, this could involve some type of litigation or voluntary surrender of property.
This guidance is required in order to comply with the current alignment of Collection Field Area Operations, as it relates
to the Interim Revenue Accounting and Control System (IRACS) reports. This will ensure that the serial numbers for collateral
agreements and other acquired property are correctly entered and reconciled on the IRACS reports.
All collateral agreements and other acquired property serial numbers will be based on the alignment of the Collection Field
Area Operations as follows: Area 01 - North Atlantic
Area 02 - Central
Area 03 - South Atlantic
Area 04 - Midwest
Area 05 - Gulf States
Area 06 - Western
Area 07 - California
Area 15 - International
See IRM 5.6.1.7 for additional information regarding the serial number format.
5.6.1.7 (10-25-2011)Preparing Form 2276, Collateral Deposit Record
Upon receipt of the collateral or other acquired property, the revenue officer or advisor will: Prepare Form 2276, Collateral Deposit Record, for identification of the collateral agreement and for adequate control through IRACS.
Complete all applicable items on the form. Generally, items 1 through 11.
Item 2 - Serial Number - the revenue officer will contact Advisory for assignment of a unique serial number.
The serial number identifies the fiscal year, Collateral (CDR) or Acquired (ACQ), Collection Field Area Operations location
and Office code, three digit sequence number and an alpha number, if applicable.
Fiscal Year and "CDR"
or " ACQ"
Collection Field Area Operations - Area (01 through 07, 15) AND Local Office Group Code
Three Digit Serial Sequence Number and Alpha Definer (if applicable)
In the example above, Fiscal Year 10; CDR; Collection Area 04, Group 10; Sequence Number 001 with no "alpha"
code. Alpha codes are used to differentiate international collateral situations. Use "F"
to designate Federal Excise Tax (FET) collateral, "CI"
to designate Captive Insurance collateral and "X"
for Expatriate Tax collateral. The alpha codes provide a control mechanism for the South Atlantic Territory to differentiate
the collateral agreements listed on the RACS 135 Report. FIRPTA collateral are housed only in the Central Territory and represent
a very small inventory.
Item 7(b) - include the expiration date of the collateral agreement.
Item 7(d) - determine if a value should be given in the column or if the word "safekeeping"
is applicable for the type of collateral agreement secured. If in the agreement there is. . .
Then Classify as. . .
On Form 2276 for financial reporting purposes. . .
No assessed liability, i.e., only a potential future tax liability, such as an International collateral
Enter "Safekeeping"
in item 7(d) and the value in item 7(e).
an Assessed liability but No unilateral right to the property, i.e., Escrow Agreements
An assessed liability And a unilateral right, i.e., cashiers' check, bearer bonds, irrevocable letter of credit, mortgages, surety bonds, etc.
Enter the value in items 7(d) and 7(e) for area information purposes.
Seized Assets, Sales, Deposits, etc. Collateral
Other Acquired Property
Value of Acquired Property or "Safekeeping"
After approval Advisory will: Seal the collateral, with a copy of the agreement, in an envelope and sign the envelope across the seal.
Maintain adequate security of the collateral and agreement in accordance with IRM 10.2.13, 10.2.14 and 10.2.15.
Retain parts 6 and 7.
Open an Advisory control module on ICS using the action code 184.
In addition to the above actions, the advisor will: complete items 12 and 13 of parts 2 through 5 of Form 2276 to acknowledge receipt of the collateral. Notate in the "Remarks"
section of part 2, "collateral was received and verified prior to sealing the envelope."
photocopy part 2 of Form 2276.
Dispose of the Form 2276 as follows: retain the photocopy of part 2 to ensure the item appears on the subsequent Area Office Inventory Report.
store part 2 and the collateral in a secure area as described in IRM 10.2.14.3.2.
send part 3 of the Form 2276 to the IRACS unit for necessary action.
Seized assets, sales deposits, and other items held are not collateral even though a Form 2276 is prepared; they are held
by Advisory for security purposes. When preparing Form 2276: Enter seizure number on the collateral deposit record. Enter "Safekeeping"
Attach a copy of Form 2433.
Do not send a copy of Form 2276 to IRACS. The use of Form 2276 is for internal control and accountability.
5.6.1.7.1 (07-01-2006)Rejection of Collateral Security
Advisory will: Check the appropriate block on the reverse of parts 4 and 5 of Form 2276.
Forward the collateral item together with part 5 to the initiator for return to the taxpayer.
Retain remaining parts of Form 2276.
Close out the open Advisory control module on ICS.
5.6.1.7.2 (07-01-2006)Interim Revenue Accounting and Control System (IRACS)
Collateral inventory is controlled through IRACS. The inventory is maintained in the IRACS database. Refer to IRM 3.17.63.23.3
for additional information regarding IRACS collateral.
This information is maintained by the IRACS Unit at the Ogden Campus and is reported to each Advisory Area monthly.
5.6.1.8 (07-01-2006)IDRS Input
IDRS Transaction Code (TC) 524 is used to identify the kind of collateral security, maintain a control and provide monitoring
of the suspended accounts.
Advisory will prepare Form 4844, Request for Terminal Action, for input of TC 524 with the proper closing code, and the number of cycles of suspension. TYPE OF COLLATERAL
Cashier's, treasurer's, or certified check
All other collateral, i.e., bonds, notes, stocks, mortgages, etc.
Input of TC 524 updates the balance due status to 40 or 41, removing it from active inventory.
5.6.1.9 (10-25-2011)International Collateral Agreements
There are four types of international collateral agreements. The first three are "non-equity"
collateral agreements involving international companies that do not have taxable income, but are involved in business
activities with United States owned companies. The fourth is when a taxpayer decides to expatriate from the United States
but wishes to defer payment of tax.
Foreign Investment Real Property Tax Act (FIRPTA) - This type of collateral agreement is controlled in Advisory Mid-Central
Federal Insurance Excise Tax - These agreements, as well as (c) and (d) are controlled in the South Atlantic Territory.
Captive Insurance (CI)
For additional information on obtaining collateral serial numbers on "international"
collateral agreements, see IRM 5.6.1.6 and IRM 5.6.1.7.
Alpha characters are used to differentiate different International collateral agreements within the South Atlantic Advisory
Territory. The letter "E"
is used to designate Federal Insurance Excise Tax collateral. The letters "CI"
designate Captive Insurance collateral. The letter "X"
designates Expatriate Tax collateral.
5.6.1.9.1 (10-25-2011)Foreign Investment Real Property Tax Act (FIRPTA)
The Tax Reform Act of 1984, section 129, 1984-83 (Vol. 1) C.B. 163, added section 1445 to the Internal Revenue Code (IRC)
as a means of enforcing the tax imposed by IRC section 897 on the disposition of investments in U.S. real property by foreign
persons. The disposition of a U.S. real property interest by a foreign person (the transferror) is subject to the Foreign
Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.
See Rev. Proc. 2000-35, IRM 4.61.12 and IRM 21.8.5 for more detailed discussions of FIRPTA determination procedures.
Advisory involvement consists in establishing a collateral agreement control when security is pledged as a condition for a
large foreign corporation receiving a withholding certificate.
The acceptable types of security are:
Guarantee, or
Any other security acceptable to Advisory Territory Managers under SBSE Del. Order 4.23.
5.6.1.9.1.1 (10-25-2011)Processing of Security Agreements
All requests for withholding certificates are received by the Philadelphia Campus for review by the Examination FIRPTA Coordinator.
The withholding certificate requests will consist of:
Application for Withholding Certificate,
Agreement for Payment of Tax (Security Agreement),
Those requests involving large foreign corporations are forwarded to the Mid-Central Territory Advisory FIRPTA Coordinator
in Pittsburgh, PA to evaluate the collateral security agreement to ensure:
that it conforms to Rev. Proc. 2000-35,
that the security pledged is adequate to protect the government's interest. The Advisory FIRPTA Coordinator will establish an NFOI on ICS, documenting the receipt date, within 7 calendar days of receipt
from the Examination FIRPTA Unit.
If the agreement and/or collateral is not acceptable, the Advisory FIRPTA Coordinator will document any deficiencies in ICS,
annotate corrections on a copy of the Agreement, send 14 day letter (Exhibit 5.6.1-1) and establish follow-up on ICS.
If no response is received by the follow-up date, send the 7 day follow-up letter (Exhibit 5.6.1-2).
If no response is received by the second follow-up date, reject the agreement back to the Examination FIRPTA Unit via memorandum
stating the reason(s) for rejection, and
Close ICS NFOI within 10 calendar days.
If Advisory has other concerns that the request does not conform to the provisions and requirements of Rev. Proc. 2000-35,
the Advisory FIRPTA Coordinator will contact Area Counsel via memorandum to ensure all legal requirements will be satisfied.
If the agreement is acceptable upon receipt, or worked to an acceptable level, and the collateral security verified, the agreement
will be approved in accordance with SBSE Delegation Order 4.23.
Once the agreement is signed by the Advisory Territory Manager, a collateral deposit record is created on the Revenue Accounting
Control System (RACS) Report 135. See IRM 5.6.1.7 for instructions on preparation for Form 2276, Collateral Deposit Record, and establishing a collateral property account on RACS.
Enter the FIRPTA case number provided by the Examination FIRPTA Unit in the top right hand of Form 2276.
All collateral will be secured for safekeeping.
A copy of the executed agreement and a copy of Part 4 of Form 2276 will be sent via memorandum to the Philadelphia Campus
Examination FIRPTA Unit.
The Philadelphia Campus Examination FIRPTA Unit is responsible for issuing the appropriate withholding certificate to the
5.6.1.9.2 (10-25-2011)Federal Insurance Excise Tax
Internal Revenue Code (IRC) section 4371 imposes a tax (the " insurance excise tax"
) on certain insurance or reinsurance policies. See Rev. Proc. 2003-78 for the procedures for entering into a closing agreement
to obtain a waiver of the insurance excise tax under certain income tax treaties.
In addition to a number of other requirements outlined in Rev. Proc. 2003-78 for obtaining a closing agreement, the foreign
insurer must provide an irrevocable letter of credit (LOC) to be issued by a bank approved by the Service in the amount of
The Large and Mid-Size Business (LMSB) business unit has responsibility for the implementation and execution of insurance
excise tax provisions.
Advisory has responsibility for the collateral agreement portion of the program with respect to the maintenance and disposition
of the LOC. Program management is under the South Atlantic Territory in the Plantation Advisory office.
5.6.1.9.2.1 (10-25-2011)Advisory Actions
After execution of the appropriate closing agreement, LMSB sends the LOC to Advisory.
Advisory will date stamp the envelope the same day it is received in the office. Within 7 calendar days for receipt, Advisory
will prepare and process Form 2276, Collateral Deposit Record, in accordance with IRM 5.1.6.7.
Federal Excise Insurance collateral agreements are identified on the Area RACS 135 Collateral Report with the definer "E"
at the end of the CDR.
The Advisory file will consist of:
Form 2276,
Original LOC,
Original Amendments, as appropriate, and A copy of the Closing Agreement,
5.6.1.9.3 (10-25-2011)Captive Insurance (CI)
An IRC 953(d) election allows a foreign controlled corporation (as defined in section 953(d)(1)(A)) that is engaged in an
insurance business to elect to be treated as a U.S. corporation for income tax purposes, and, thus, to be subject to U.S.
tax on its worldwide income.
Taxpayers that make the elections are corporations that are formed outside the U.S. The majority of income earned by such
taxpayers is income that is effectively connected with a U.S. trade or business. Taxpayers make an IRC 953(d)election to
avoid the branch profits tax or the branch level interest tax imposed by IRC section 884. A foreign corporation that makes the election granted under IRC section 953(d) waives all benefits granted to it by the U.S.
under any treaty between the U.S. and any foreign country. Section 953(d) was added to the IRC section by the Technical and
Miscellaneous Revenue Act of 1988. Revenue Procedure 2003-47; 2003-28 I.R.B. 55 provides the procedural rules for foreign insurance companies to make an election
under IRC section 953(d).
This revenue procedure replaces the procedural rules for making an IRC 953(d) election contained in Section II of Notice 89-79,
1989-2 C.B. 392. The substantive rules contained in Notice 89-79 continue to be effective. The election has been available
for tax years beginning after December 31, 1987.
The taxpayer initiates the election process by filing a completed election statement with Advisory, South Atlantic Area, Plantation
5.6.1.9.3.1 (10-25-2011)Taxpayer Election Procedures
The taxpayer must file its election statement with the Plantation office not later than the due date prescribed in Section
6072(b) (with extensions) for the first return due if the election becomes effective.
a.The taxpayer also must timely file (as prescribed by Section 6072(b) with the Service Center a copy of the election statement
with its annual income tax return for the first year for which the election is made. The due date for Form 1120 filed on
the calendar basis is March 15th (excluding a valid extension of time to file ( Form 7004). The postmark of the envelope
will be used as the controlling date. A grace period of seven (7) calendar days should be allowed. The Service will also consider
a timely faxed submission of an election statement as long as it is followed with an original. Examples of situations where
elections can be considered timely filed:
An election statement was submitted to the Service Center attached to a timely filed tax return, but was not filed separately
with the designated office. The original return will have to be ordered from the Service Center. The election is subsequently
filed with the designated office after the due date. As long as the intent was to timely file the election, it should be processed
A separate election statement was not submitted or the statement was not attached to a timely filed return, but the first
page of a timely filed return shows that the block next to IRC 953(d) is checked (the block can be found at the top of the form near the name and address). Again the original return should be
ordered. The election is subsequently filed with the designated office after the due date.
The taxpayer claims that an election statement was submitted to the designated office but there is no record of having received
it. The taxpayer should resubmit the election and provide documentation (i.e. certified receipt acknowledging the Service’s
receipt) to show that the original election was timely filed.
With respect to election requests submitted under IRC section 501(c)(15), Advisory will determine that the exempt status (See
IRM 7.14.1) or that Form 1024, Application for Recognition of Exemption under Section 501(a), is on file with the Service.
5.6.1.9.3.2 (10-25-2011)Advisory Procedures
Upon receipt of the election, an NFOI Action Code 188 (Captive Insurance) will be loaded onto ICS within 7 calendar days
of receipt of the election. Advisory will date stamp the envelope and retain with the election statement. Do not date stamp or make any other notations
on the election statement itself. The elections should be batched monthly to coincide with the monthly reporting period. Less
than a dozen taxpayer representatives submit the majority of elections, the elections should be further batched by representative
within each month’s receipts. This will facilitate initial review and preparation of necessary correspondence.
Elections are reviewed on a first-in, first-out (FIFO) basis. Requests for expedited reviews should not be entertained. Review
elections in monthly batches.
Review the postmark to determine timeliness of filing.
If the election statement was not timely filed a letter should be mailed to the taxpayer along with a copy of the election
statement and envelope advising them of the late filing. The letter provides the taxpayer the opportunity to present any extenuating circumstances and supporting documents.
The letter should provide a specific date for response and advise the taxpayer of the consequences i.e., case will be closed
without further notice. While the response date will generally be 30 calendar days from the date of the letter, a 60 day response date is allowed
if the contact address discussed in IRM 5.6.1.9.3.2(4) is overseas where mail service is sometimes erratic.
Any taxpayer response to the determination of an untimely election should be carefully reviewed and considered. A written
response should be mailed to the taxpayer within 10 calendar days of receipt of the response.
The contact address should be the U.S. address identified in paragraph 6 of the election statement. If a U.S. address is not
identified then the foreign address identified in paragraph 1 of the election statement should be used.
If the U.S. address is used, then the foreign address should be added as an "other address"
in the Name/Address option of the Entity Detail Menu.
Enter the Power of Attorney data in the Name/Address field.
A foreign address or country of foreign incorporation should always be identified in the election statement. If not, the election
should be returned. Review the election statement for errors. Use Appendix A of Rev. Proc. 2003-47 as a guide for the required content. Virtually
all of the statements filed will be filed using this suggested format. The following are examples of common errors:
Asset Calculation Sheet not included, out dated figures used, 105 test not met, and/or the entity is not actively involved
in insurance business and not for investment purposes (zero gross premiums);
U.S. shareholders list not attached and or EINs/SSNs missing or incorrect;
Forms 2848 and or 8821 not attached or properly executed (unsigned, incomplete, etc.);
EIN not provided or incorrect;
Unsigned election statement;
Compliance (unpaid balance, unfiled return(s));
Foreign place of incorporation not identified;
Effective date missing;
Penalty of Perjury statement missing.
If corrections are needed, send the appropriate letter to the taxpayer with a copy to the POA. All Service requests for additional
information should be in writing and will state the corrections needed, include a specific date for response and advise the
taxpayer of the consequences for non-response.
Determine whether the taxpayer will be providing security (letter of credit) or whether an affiliate will meet the Office/Assets
Test for the taxpayer. A closing agreement is required in either situation.
When an election statement is complete and it conforms to the guidelines prescribed in Rev. Proc. 2003-47, it can be approved
by rubber stamping the election statement APPROVED. The original stamped election statement is maintained by Advisory with copies sent to the taxpayer and or POA using an original
dated cover letter. Keep a copy of the cover letter with the file.
Annotate ICS history of all actions taken. Once the election is either approved or rejected it should be closed out on ICS.
A print of the case history should be maintained with the closed file.
Those elections where the taxpayer will be providing a letter of credit should initially be opened under Action Code 188.
When the election is finally approved, the 188 should be closed and an NFOI reopened under Action Code 184 (Collateral) for
5.6.1.9.3.3 (10-25-2011)Collateral Security
If paragraph 6 indicates that the taxpayer will be providing security, mail the taxpayer Chief Counsel’s data sheet titled
"For Closing Agreements Where a Letter of Credit is Required"
with an appropriate cover letter.
The data sheet is to be completed by the taxpayer and sent directly to Associate Chief Counsel for International.
Counsel will prepare the closing agreement (in triplicate, marked Original, Duplicate & Triplicate) and return them to the
taxpayer to be signed. The taxpayer will return the signed closing agreements back to Counsel to be signed by Deputy Chief Counsel (International-Technical).
Once signed, the closing agreements will be mailed to Advisory for signature by the delegated official, the Advisory Territory
Manager, South Atlantic Area.
The agreements are forwarded for signature along with a copy of the election statement and copies of two Counsel memoranda
designating the Authority to Enter into Closing Agreements as background material.
At the same time that the closing agreements are sent to the delegated official, notify the taxpayer and POA by fax to submit
the letter of credit in the amount designated in the closing agreement. The closing agreement also spells out the proper language
and terms and conditions for the letter of credit.
Upon receipt of the letter of credit, Advisory will review it to ensure it conforms to the requirements as stated in the closing
The primary requirements that are reviewed are the correct dollar amount as required by the closing agreement and that the
letter of credit contains an "evergreen clause."
stating the expiry notification period must be at least six (6) months (180 days) prior to the expiration date.
An evergreen letter of credit is one that has an expiry (expiration) date but contains a provision, referred to as an evergreen
clause, that the letter of credit will be automatically extended (rolls over) for indefinite periods until the issuing party
informs the Service and the taxpayer of its final expiration. Other conditions required of the letter of credit:
It must be conspicuously captioned as a clean irrevocable letter of credit; It must be issued by a U.S. Bank that is a member of the Federal Reserve; The amount of the letter of credit must be written out and stated in numerical form;
It must conspicuously state the expiration date;
It must state that the letter of credit may be drawn on by a draft of the Internal Revenue Service drawn at sight with no
accompanying documentation necessary and duly honored if presented for payment on or before expiration of the letter of credit.
If the letter of credit does not conform to the aforementioned standards, a letter should be drafted and sent to the taxpayer
explaining the required corrections. Do not return the letter of credit. The taxpayer will secure an amendment to the letter
of credit from the issuing financial institution. After the closing agreement is executed by the delegated official and the letter of credit is received, use the appropriate
cover letter to send the taxpayer and POA the triplicate copy of the closing agreement, a copy of the election statement stamped
APPROVED and Part 1 of Form 2276, Collateral Deposit Record.
Form 2276 must first be assigned a serial number. See IRM 5.6.1.6 and IRM 5.6.1.7.
There will be instances where a taxpayer, who has a letter of credit on file, will be able to meet the Office/Assets Test
themselves or have an affiliate meet the test for them. These cases will require an amended election statement/closing agreement
and the ICS Action Code 184 should be closed once the letter of credit is returned. In cases where an affiliate will meet
the Office Assets Test for the taxpayer and a closing agreement is required, an OI should be opened under 188 and closed out
once the election is approved.
5.6.1.9.3.4 (10-25-2011)Compliance Review
On an annual basis a compliance check should be conducted on all IRC section 953(d) entities who are the subject of closing
agreements involving letters of credit. The check should ensure that all returns have been filed and paid.
If there are compliance issues, the appropriate letter should be mailed to the taxpayer addressing the compliance issue(s),
providing the entity with a deadline to correct and advising them of the risk of termination of the election.
The latest filed return should be reviewed (BRTVUE) to determine if there could have been an increase in gross income by more
than 20% of the amount of gross income for the base year.
The closing agreement requires the taxpayer to monitor and calculate this amount on an annual basis. Experience has shown
that this is not always done and therefore the reminder letter is required. Failure to maintain a letter of credit at the
proper level is grounds for termination of the election.
Such an increase would require the taxpayer to submit an amended, or new, letter of credit reflecting the new base year assets
requirement (10%). Because the gross income as defined in IRC sections 803 or 832(b)(1) cannot be determined from BRTVUE,
the appropriate letter and Assets Calculation Worksheet should be mailed to the taxpayer to be completed and returned.
5.6.1.9.4 (10-25-2011)IRC section 877A - Tax Responsiblities of Expatriation
Section 301 of the Heroes Earnings Assistance and Relief Act of 2008 (the "Act"
) added new section 877A to the Internal Revenue Code which apples to individuals who on or after June 17, 2008, relinquish
U.S. citizenship or cease to be lawful permanent residents of the United States.
See Notice 2009-85 and IRM 21.8.1.11.23, IRC section 877A - Mark-To-Market Exit Tax, for complete guidance for expatriation and taxable consequences.
See Form 8854, Expatriation Information Statement and Form W-8C, Notice of Expatriation and Waiver of Treaty Benefits for reporting responsibilities for former U.S. citizens or long-term residents who are subject to the provisions of IRC section
5.6.1.9.4.1 (10-25-2011)Expatriate Tax Provisions
IRC section 877A generally imposes a "mark-to-market "
regime on expatriates who are covered by IRC section 877A, providing that all property of a covered expatriate is treated
as sold on the day before the expatriation date for its fair market value. Section 877A further provides that any gain or
loss arising from the deemed sale is taken into account for the taxable year of the deemed sale notwithstanding any other
IRC section 877A(g)(2) provides that the term "expatriate"
any U.S. citizen who relinquishes his or her citizenship and,
any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the
meaning of section 7701(b)(6), as amended).
A "covered expatriate"
as defined in IRC section 877A(g)(1)(A) and (B) is any expatriate that meets the criteria outlined in IRM 21.8.1.11.23.1(1)
The determination as to whether an individual is a covered expatriate is made as of the expatriation date.
IRC section 877A(g)(3) defines the term "expatriation date"
as the date an individual relinquishes U.S. citizenship or, in the case of a long-term resident of the United States,
the date on which the individual ceases to be a lawful permanent resident of the United States within the meaning of IRC section
7701(b)(6). See IRM 21.8.1.11.23.1(5) and (6) for expatriation date determinations for citizens and long-term residents.
Pursuant to IRC section 877A(b), a covered expatriate may elect to defer payment of the tax attributable to property deemed
5.6.1.9.4.2 (10-25-2011)Deferral of Mark-To-Market Tax
IRC section 877A(b) provides that a covered expatriate may make an irrevocable election with respect to any property deemed
sold by reason of section 877A(a) to defer the payment of the tax attributable to any such property. The deferral election
is made on an asset-by-asset basis. In order to make the election with respect to any asset, the covered expatriate must
provide adequate security as defined in IRM 5.6.1.9.4.3(1) and must irrevocably waive any right under any U.S. treaty that would preclude assessment or collection of any tax imposed
by reason of section 877A. The covered expatriate must make the waiver on Form 8854, Expatriation Information Statement. If the IRS subsequently determines that the security provided for the deferred tax no longer qualifies as adequate security,
the deferred tax and interest will become due immediately, unless the covered expatriate corrects such failure within 60 days
after the IRS mails notification of such failure to the last known addresses of the covered expatriate and the covered expatriate’s
U.S. agent. See IRM 5.6.2.8.4.
Subject to the preceding sentence, the time for payment of the tax attributable to a particular deferral asset under the mark-to-market
regime is extended until the earlier of the due date (without extensions) of the covered expatriate’s income tax return for:
the taxable year in which the asset is disposed of by sale, non-recognition transaction, gift, or other means, or
the taxable year that includes the date of death of the covered expatriate.
However, a covered expatriate may, and should be encouraged to, pay any tax deferred under IRC section 877A(b), together with
accrued interest, at any time.
IRC section 877A(b)(7) provides that for purposes of IRC section 6601, the last date for the payment of tax will be determined
without regard to the deferral election. Interest will be computed at the underpayment rate established under IRC section
6621 from the due date of the return (without extensions) for the taxable year that includes the day before the expatriation
date and will compound daily under IRC section 6622 until the date the tax is paid.
IRC section 877A(b)(5) provides that a covered expatriate may not make a deferral election with respect to a particular asset
unless the covered expatriate makes an irrevocable waiver of any right under any U.S. treaty that would preclude the assessment
or collection of any tax imposed by reason of section 877A. The covered expatriate must make the waiver on Form 8854, which
must be filed with the covered expatriate's Federal income tax return for the taxable year that includes the day before the
expatriation date. See section 8.C of this notice. Additionally, acknowledgment of such waiver must be noted in the agreement
to defer tax with respect to a particular property ("tax deferral agreement"
) as described below.
5.6.1.9.4.3 (10-25-2011)Collateral Procedures
Section 877A(b)(4)(A) provides that, in order to make a deferral election with respect to any asset, the covered expatriate
must provide adequate security with respect to such asset. IRC section 877A(b)(4)(B) defines the term “adequate security”
a bond that is furnished to, and accepted by, the Secretary, that is conditioned on the payment of the tax (and interest thereon),
and that meets the requirements of section 6325, or
another form of security for such payment (including letters of credit) that meets such requirements as the Secretary may
Each covered expatriate who makes a deferral election must enter into a tax deferral agreement with the IRS. Execution of
the agreement by the IRS will constitute acceptance by the Secretary of the security as adequate security. A template of
a tax deferral agreement is provided in Appendix A of Notice 2009-85. Any covered expatriate who wishes to enter into a tax
deferral agreement under this notice must submit to the following address a request to enter into a tax deferral agreement
(“deferral request”) by the due date of his or her return for the taxable year that includes the day before the expatriation
Internal Revenue Service PO Box 331
Drop Point S607-F8854
The deferral request must include:
two signed copies of the template agreement provided in Appendix A of Notice 2009-85,
a description of the asset(s) with respect to which the covered expatriate is electing to defer tax,
an attachment showing the calculation of the tax attributable to such asset(s) under the method set forth below,
documentation of the proposed security offered to secure the deferral of tax,
a copy of an agreement with a U.S. agent, as described below, and
a copy of the covered expatriate’s return for the taxable year that includes the day before the expatriation date.
Provided that the security offered by the covered expatriate is determined to be adequate to secure the tax being deferred,
the IRS will sign the tax deferral agreement and provide one copy to the covered expatriate. Additionally, the covered expatriate must attach a copy of the deferral request to his or her return for the taxable year
that includes the day before the expatriation date. The covered expatriate may file the deferral request simultaneously with
his or her tax return.
In order to make a deferral election, a covered expatriate must appoint a U.S. person to act as the covered expatriate’s limited
agent for the purposes of:
accepting communication related to the tax deferral agreement from the IRS on behalf of the covered expatriate,
the timely enforcement of the terms of the tax deferral agreement between the covered expatriate and the IRS,
applying section 7602 and all related procedural provisions of the Code with respect to a request by the IRS to examine records,
for the production of testimony, or for a summons by the IRS for such records or testimony related to the enforcement of the
tax deferral agreement.
If the U.S. agent resigns, liquidates, or terminates its responsibility as an agent of the covered expatriate, the covered
expatriate must, within 90 days, notify IRS-Advisory in writing at the following address: Internal Revenue Service - Advisory 7850 SW 6th Court Mail Stop 5780
Telephone: 954-423-7344, Fax: 954-423-7809
This notification must contain the name, address, and TIN of the new U.S. agent (if any). If no new agent is appointed,
then the tax deferral agreement will be in default and the collateral will be applied to the deferred tax and interest attributable
to all of the deferral assets. In the event that the security provided with respect to a particular property subsequently fails to meet the requirements
of the deferral agreement and the individual fails to correct such failure, the deferred tax and the interest with respect
to such property will become due immediately.
The covered expatriate will have 60 days to correct such failure after the Service mails Letter 4536, Insufficient Initial
Collateral, providing notification of such failure to the last known addresses of the covered expatriate and the covered expatriate’s
The tax deferral agreement shall be effective for a period of three years from the date of execution and may be renewed.