Deferred Sales Trust Audit Risk — What the IRS Actually Does

Here's what the IRS actually does with DSTs and why the IRC §453 Structured Installment Sale carries zero of that audit profile.

The DST audit history (open and ongoing)

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

1. Sham trust doctrine — the IRS argues the trust isn't a bona fide separate taxpayer; it's 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 meaningful business purpose beyond tax deferral.

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

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 DST 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 major life carrier (A-rated Fortune 500 companies)
4. The carrier pays you on the agreed schedule

The mechanic is the same as IRC §130 structured settlements, which have been used routinely since 1982 and have an IRS-blessed audit profile. The §453 SIS extends this to commercial sales.

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

When a DST might still be the right call

I'll be honest — there are situations where DST 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, IRC §453 specialist. If you have a DST quote, bring it. I model §453 vs your DST side-by-side on identical numbers. If DST is genuinely the right tool, I'll tell you and refer you to a legitimate trustee. Most aren't.

an A-rated Fortune 500 carrier / an A-rated Fortune 500 carrier / an A-rated Fortune 500 carrier / an A-rated Fortune 500 carrier — all 50 states. Free 15-min fit-check.

Frequently asked

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

Q: My DST promoter says they've never lost an audit. A: That's a marketing statement. Ask for: (a) the number of DSTs 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 DST is? A: Safer. §453 is in the code; the SIS mechanic uses IRS-blessed assignment-company infrastructure from the §130 structured-settlement world. No theory has to hold for SIS to work — it just is what the code says.

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

Educational. Not tax or legal advice. Get a written opinion letter on DST risk from independent counsel before signing — most promoters do not provide one.