What to Do If You Receive an IRS Letter About a Deferred Sales Trust

Have you been contacted by the Internal Revenue Service (IRS) about your deferred sales trust (DST)? Perhaps you’ve been given a notice of audit or asked to furnish additional documents. Regardless of the specific instructions, you should consult with an experienced attorney to discuss your next steps. At 453 Trust Powered by Pennington Law, our team takes IRS compliance seriously. We can review your trust structure and guide how to respond to an IRS letter regarding a DST. Contact us today for a free consultation. 

How a 453 Trust Attorney Can Help With an IRS DST Inquiry

An experienced lawyer from 453 Trust Powered by Pennington Law can help when you receive an IRS letter about your deferred sales trust by: 

• Reviewing the correspondence to understand the reason(s) for the letter
• Gathering relevant information and documentation about your trust
• Evaluating how you should respond to the letter
• Communicating with IRS staff on your behalf

Our firm is staffed by attorneys and professionals trained in trust law, tax law, financial advising, estate planning, asset protection, and wealth preservation. By keeping all of these services under one roof, we can carefully review your IRS letter and suggest a comprehensive strategy to address it. 

Immediate Steps to Take After Receiving an IRS Letter

Here’s what to do after you’ve received an IRS letter about your deferred sales trust:

• Don’t panic – Not every letter from the IRS means trouble. The IRS typically communicates initially via letter. The letter may just be to notify you about something or to request specific information or documentation. 
• Do not ignore it – You should open written correspondence from the IRS promptly and review the letter to understand the reason(s) for its issuance. The letter may set a specific deadline for your response, and procrastinating may jeopardize your rights and interests.
• Review the letter – Read the letter carefully to determine what the IRS wants. Some letters may have a number in the top-right corner indicating the subject matter of the letter. The letter may also provide specific instructions regarding the actions you must take or your legal options.
• Verify the information – The letter may contain other information underlying the IRS’s decision or the reason(s) for sending it. You should verify that information against your records, as IRS personnel may make errors.
• Consult an experienced 453 Trust attorney – Finally, you should contact a lawyer with experience structuring deferred sales trusts to explain the letter’s contents and what the IRS expects.

Why You Might Receive an IRS Letter About a Deferred Sales Trust

The purpose of a deferred sales trust is to defer capital gains taxes on the sale of an asset, but it must be properly structured and comply with the requirements of Internal Revenue Code §453. If the IRS believes that a deferred sales trust does not meet these requirements, it may contact the parties involved in the trust for supplemental documentation or to notify them that the agency intends to audit the trust for compliance with tax laws and regulations. The IRS may question whether a deferred sales trust complies with applicable tax laws due to discrepancies or irregularities in tax returns or upon receiving a complaint regarding a DST.

When to Consider Legal Representation for IRS Correspondence  

You should contact an attorney as soon as the IRS reaches out regarding your deferred sales trust. Prompt legal guidance can help you respond appropriately, provide requested documentation, and potentially prevent more serious actions. A skilled attorney can help you prepare a response to protect your rights.

Common Types of IRS Notices Related to Deferred Sales Trusts

Some of the most common types of notices the IRS might send when inquiring about a deferred sales trust include:

• Summons to produce documents – The IRS may request that you produce documents related to the trust as part of its routine auditing, examination, or collection procedures, or if the IRS needs additional information to determine compliance with tax laws and regulations. Potential requests may include providing them with copies of the trust document, installment agreement, asset transfer documents, purchase and sale agreements, and financial records.
• Notice of audit – The IRS may notify you of an audit of a specific tax return. The notice will explain why the IRS questioned the filing and what documents you must produce during the audit.
• Notice of proposed adjustment – Should the IRS determine that a deferred sales trust fails to comply with installment sale tax rules, it will issue a notice proposing changes to the former asset owner’s return to recognize the capital gains tax from the asset sale in the year in which the sale occurred. This would make the owner liable for the full tax liability, plus accrued interest since the beginning of the tax year. The taxpayer generally has 30 days from the date of the notice to respond to or contest this notice.
• Notice of deficiency – A taxpayer may receive a notice of deficiency if they disagreed with a prior notice of proposed adjustment and were unable to resolve the dispute with the IRS during an audit. This notice requires them to pay the proposed unpaid tax, interest, and penalties, and gives them 90 days (150 days if living outside the U.S.) to contest the notice by filing a petition with the U.S. Tax Court.

Why You Might Receive an IRS Letter About a Deferred Sales Trust

The purpose of a deferred sales trust is to defer capital gains taxes on the sale of an asset, but it must be properly structured and comply with the requirements of Internal Revenue Code §453. If the IRS believes that a deferred sales trust does not meet these requirements, it may contact the parties involved in the trust for supplemental documentation or to notify them that the agency intends to audit the trust for compliance with tax laws and regulations. The IRS may question whether a deferred sales trust complies with applicable tax laws due to discrepancies or irregularities in tax returns or upon receiving a complaint regarding a DST.

Possible IRS Audit Outcomes for Deferred Sales Trusts

An IRS audit of your deferred sales trust may result in one of several outcomes, including: 

• No action – The IRS may uphold the validity of the deferred sales trust under IRC 453, meaning it will take no further action or impose additional taxes, interest, or penalties. A DST may pass an audit if the trust has a bona fide independent trustee, no constructive receipt of the sale proceeds by the original asset owner, and an arm’s-length transaction between the original owner and the trust for an installment agreement outlining the installment payments to the owner.
• Transaction collapse – If the IRS finds errors in the DST’s setup, it may treat the transaction as a direct sale between the original asset owner and the buyer. In this case, the owner could owe the full capital gains tax liability plus interest.
• Sham trust determination – The IRS could determine that the DST is a sham if the trust lacks independence from the asset owner or was created solely to avoid taxes. This would result in the owner being liable for the full amount of capital gains tax, accrued interest, and, potentially, an additional penalty of up to 75 percent of the unpaid taxes.

Contact an Experienced 453 Trust Lawyer Today

Has the IRS contacted you about your deferred sales trust? You need a national law firm experienced in trust structures, IRS regulations, and responding to IRS inquiries. Contact 453 Sales Trust Powered by Pennington Law today for a free consultation.