Form 8866: How to Calculate and Pay Interest

An executor of an estate may elect to pay estate taxes on an installment plan under specific circumstances. This deferral, authorized by Internal Revenue Code Section 6166, is designed to help estates that consist largely of an interest in a closely held business avoid the forced sale of assets to pay the tax. The election is made on Form 706, the U.S. Estate Tax Return.

When an estate qualifies for and elects this deferral, interest accrues on the deferred tax amount and must be paid annually. While the initial election is made on Form 706, the subsequent annual interest payments do not have a specific, dedicated IRS form. The estate’s executor is responsible for correctly calculating the interest each year and remitting it to the IRS.

Annual Interest Payments

Annual interest payments are a mandatory component of the Section 6166 deferral. The requirement to pay interest begins nine months after the date of the decedent’s death, which is the original due date for the estate tax. For up to five years, the estate may be required to pay interest only. After this initial interest-only period, the estate begins to pay the deferred tax in up to ten annual installments, with each installment including both principal and the accrued interest for that year.

This cycle of annual interest payments continues for as long as there is an outstanding deferred tax balance. While the IRS may send a notice and demand for the payment, the responsibility for tracking the due dates and ensuring timely payment rests with the executor. Failure to make a timely interest payment can result in the acceleration of the entire unpaid balance of the estate tax, making it immediately due and payable.

Information Required for the Calculation

To calculate the annual interest, the executor must have the total amount of estate tax deferred under the Section 6166 election. This amount is determined from the estate’s filed Form 706. You will also need the date of the decedent’s death, which establishes the timeline for all payments.

The calculation involves two different interest rates. A 2% interest rate applies to a portion of the deferred tax. For 2025, this rate applies to the tax on the first $1,900,000 of the closely held business amount, which corresponds to a maximum deferred tax of $760,000.

Any deferred tax exceeding this threshold is subject to a higher interest rate of 45% of the annual rate charged by the IRS for tax underpayment. This underpayment rate can change quarterly, so you must identify the correct rate from the IRS website for the period you are calculating.

How to Complete the Calculation

The annual interest calculation separates the deferred tax into two tiers. First, you address the portion of the tax that qualifies for the 2% rate. For example, if the entire deferred tax is $500,000, which is below the 2025 threshold of $760,000, the annual interest would be a straightforward calculation of $500,000 multiplied by 2%, resulting in a $10,000 interest payment.

The second part of the calculation applies if the deferred tax exceeds the 2% portion threshold. The excess amount accrues interest at 45% of the IRS underpayment rate. For instance, if the total deferred tax is $1,000,000, the first $760,000 is subject to the 2% rate, and the remaining $240,000 is subject to the higher rate. If the IRS underpayment rate for the year was 7%, the applicable rate for this portion would be 3.15%, and the interest on the excess would be $240,000 multiplied by 3.15%, or $7,560.

To find the total interest due for the year, you combine the results from both calculations. In the previous example, the interest on the 2% portion ($15,200) is added to the interest on the excess portion ($7,560), for a total annual interest payment of $22,760. This calculation must be performed each year, taking into account any principal payments that reduce the outstanding deferred tax balance.

Submitting the Interest Payment

Once the total annual interest has been calculated, the executor must submit the payment to the IRS. Since there is no dedicated form for this annual payment, the payment itself serves as the submission. The payment should be made payable to the “United States Treasury.” It is important to include specific information on the memo line of the check or money order to ensure the payment is credited to the correct account.

The executor should write the estate’s Employer Identification Number (EIN), the decedent’s name, and a notation such as “Sec. 6166 Interest Payment” on the payment. This helps the IRS properly identify the estate and the purpose of the funds. The payment should be mailed to the same IRS service center where the original Form 706 was filed. It is advisable to send the payment via certified mail with a return receipt requested to have proof of timely mailing.