Deferred Sales Trust Audit Risk: What the IRS Actually Does

Below is what the IRS actually does with deferred sales trusts, and why the IRC §453 Structured Installment Sale does not carry that audit profile.

The deferred sales trust audit history (open and ongoing)

The Deferred Sales Trust has been under heightened IRS scrutiny since approximately 2014, when the agency began examining deferred sales trust promoters and individual taxpayer deferred sales trust filings under several theories:

1. Sham trust doctrine. The IRS argues the trust isn't a bona fide separate taxpayer but the seller's alter ego. If the trust is collapsed, the entire installment gain accelerates to the year of sale.
2. Assignment of income doctrine (Lucas v. Earl, 281 U.S. 111). The IRS argues you cannot assign income away from the original earner. If the trust transaction is recharacterized as assignment, gain is recognized immediately.
3. Step transaction doctrine. The IRS may collapse the seller-to-trust-to-buyer steps into a single seller-to-buyer transaction, voiding the §453 deferral.
4. Economic substance doctrine (IRC §7701(o)). The IRS challenges whether the trust has a meaningful business purpose beyond tax deferral.

The IRS has not issued formal regulations blessing or condemning deferred sales trusts. It has examined them as part of standard installment-sale audit campaigns. Some deferred sales trust taxpayers have been successfully challenged; others have not been audited. Promoters typically do not disclose the examination history in their pitch decks.

Go deeper: an independent analysis of the deferred sales trust on Big Sale Tax.

Specific risk factors the IRS looks for

• Trustee is a related party or has no independent business
• Trust documents executed days before the sale (lack of business purpose)
• Trust never holds the asset before the sale to the buyer (form-vs-substance)
• Trust loans seller's money back to the seller via interest-only note
• Trust assets entirely consist of the proceeds from the original sale
• Trustee fee paid from sale proceeds without independent compensation analysis

If your deferred sales trust has any of these features, your audit risk is elevated.

Why the §453 Structured Installment Sale doesn't carry this risk

The IRC §453 SIS uses a fundamentally different mechanic:

1. You sell directly to the buyer. No trust intermediary.
2. The buyer's payment obligation is assigned to a qualified assignment company (regulated entity, not your trust)
3. The assignment company purchases a fixed annuity from a highly rated life insurer
4. The assignment company owes you the payments on the agreed schedule

The mechanic is the same as IRC §130 structured settlements, which have been used routinely since 1982. §130 itself covers only injury and sickness claims; the §453 SIS borrows the assignment mechanic for taxable sales and relies on the installment-sale rules instead.

No trust. No promoter. No assignment-of-income exposure. No sham-trust theory available.

What an IRS examination of a §453 SIS looks like

Standard installment-sale audit:

• IRS verifies sale price, basis, and gross profit ratio on Form 6252
• IRS verifies the installment payments received in the audit year
• IRS confirms the assignment company is a legitimate party
• Done

There is no "deferred sales trust theory" to challenge because there is no trust. The §453 mechanic is exactly what the code says it is.

When a deferred sales trust might still be the right call

To be fair, there are situations where a deferred sales trust is the better tool:

• $15M+ deferred balance where active investment management adds real value
• Estate-planning structure that benefits from holding gain inside a trust
• Investor specifically wants equity-market exposure on the deferred balance

For the median $1M-$10M business or real estate sale, §453 wins on math, on audit posture, and on cost.

How I work

Hans Goldstein, EA, IRC §453 specialist. Admitted to practice before the IRS. If you have a deferred sales trust quote, bring it. I model §453 vs your deferred sales trust side-by-side on identical numbers. If deferred sales trust is genuinely the right tool, I'll tell you and refer you to a legitimate trustee. Most aren't.

Placements with highly rated life insurers (A or better by A.M. Best or equivalent) in all 50 states. Free 15-min fit-check.

Frequently asked

Q: Has the IRS ever shut down a deferred sales trust? A: Individual deferred sales trust taxpayers have been audited and challenged. Promoter-level shutdowns are less public. The IRS has not issued formal guidance declaring deferred sales trusts invalid, but it also hasn't approved them.

Q: My deferred sales trust promoter says they've never lost an audit. A: That's a marketing statement. Ask for: (a) the number of deferred sales trusts they've placed, (b) the number examined by IRS, (c) the outcomes. Most won't disclose.

Q: Is the §453 SIS as safe as my promoter claims their deferred sales trust is? A: Safer. §453 is in the code; the SIS uses the same assignment-company infrastructure as §130 structured settlements, and its tax treatment comes straight from §453(f)(3) and Treas. Reg. §15a.453-1(b)(3)(i): a buyer's note is not a payment, even when a third party stands behind it. No trust theory has to hold.

Q: Can I unwind a deferred sales trust and pivot to §453? A: Depends on timing. If your asset sale hasn't closed yet, yes: dissolve the deferred sales trust and paper a §453 instead. If the sale has closed and the trust holds the proceeds, it's harder.

Educational. Not tax or legal advice. Get a written opinion letter on deferred sales trust risk from independent counsel before signing. Most promoters do not provide one.

New to the structure itself? Start with how a Deferred Sales Trust works, what it risks, and the §453 alternative.