Overview I. Introduction and Overview II. Preparing the Estate - - PDF document
Audits of Estate Tax Returns and Protecting the Fiduciary Client Presented to the Estate and Financial Planning Council of Central New Jersey Frank Agostino, Esq. Lawrence A. Sannicandro, Esq. April 20, 2017 1 Overview I. Introduction and
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April 20, 2017
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a. Unlike other returns, which are subject to a “lottery”, ALL estate tax returns will be individually reviewed to determine audit potential and identify the key issues for any examination. b. Estate and Gift Tax Auditors return more tax dollars per capita than any other subdivision
are emphasized.
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c. Estate and Gift Tax Auditors are specially trained in estate and gift tax matters. d. Estate tax audits – require a special strategy e. Timing: Estate tax return audits are usually initiated within nine months of the filing of the return. f. Timeline: Absent special circumstances (i.e., someone filing a reward application two years after the estate tax return is filed), estate tax audits are usually concluded no later than 18 months after filing.
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g. Characters in the cast: i. Personal representative, executor, or administrator; ii. Estate and gift tax auditor; iii. Office of Appeals (independent of exam; helps resolve issues w/o litigation); iv. Criminal Investigation (CI) (the law-enforcement division of the IRS); v. Taxpayer Advocate Service (independent of exam; helps ensure rights are understood and respected); and iii. Chief Counsel and Division Counsel (attorneys who provide technical guidance and litigate cases, respectively).
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– Request account transcripts – account, W&I, gift, and related entity – Order past gift tax returns from the IRS (Form 4506) – Copy of predeceased spouse’s estate tax return (Form 4506) – Last three years of income tax returns and bank statements – Make requests under the Freedom of Information Act (“FOIA”) – Westlaw searches (i.e., adverse judgment search to determine liabilities and liabilities) – Accurint (for information on businesses, real estate, etc. – Transunion TLOxp (“TLO”) (for information on credit, bankruptcies, foreclosures, liens, judgments, assets, professional licenses, etc.) – Google searches
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– Certified copy of Will; – Certified copy of death certificate; – Forms 712, Life Insurance Statement; – Copy of trust instruments; – Copy of power of appointment instruments; – Appraisals on real estate; – Appraisals on art (required for art objects with a value greater than $3,000); – Financial data on non-public entities; – Copies of Forms 709, United States Gift (and Generation-Skipping Transfer Tax Return – Last full year’s Federal income tax return in some States
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– Adjusted taxable gifts and gift tax paid; – Real estate (fractional interest, arm’s-length sale); – Accrued interest and dividends included; – Are you properly reporting assets transferred to a revocable trust; – Closely held businesses (sales price in formational documents, reasonable and appropriate discounts, reliable appraisal); – Life insurance (ILITs, Form 712); – Fractional interest discounts; – FLPs (indirect gift, section 2036 issues, reasonableness of discounts); – Powers of appointment – Annuities; – Expenses incurred during administration; and – Was portability properly elected?
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– Normally, three years. IRC § 6501(a) – Exceptions for false or fraudulent return or omitted income exceeding 25%
– May not be extended by agreement.
– Review of the deceased spouse’s unused exclusion amount (DSUE) is not subject to the statute of limitations on the first-to-die spouse. This means the Service can examine a predeceased spouse’s DSUE on audit of the surviving spouse. See IRC § 2010(c)(5)(B). – Practice Tip: Save the estate tax return of the first-to-die spouse forever (the IRS only keeps estate tax returns for 75 years). Also, keep complete documentation to substantiate every item on the estate tax return of the first-to-die spouse.
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the filing of the estate tax return
– Option 1: The return is not selected for audit (i.e., it is accepted as filed)
codes 20 (accepted as filed) or 35 (surveyed excess inventory)
– Option 2: The return is selected for audit (i.e., it is being reviewed)
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– Limited Scope Examination
– Limited Focus Examination
– Regular Examination
– Project Cases
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contact requests.
– Handling the initial audit interview; – Handling requests for information or documents; – Handling third-party contacts.
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the professional to escape penalties, especially in fraud cases.
counsel or refer the case to another.
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i. Know what the IRS knows. Again, reorder the following:
1. Account Transcripts 2. A FOIA Request 3. Third-party contact sheet from the IRS
ii. Fully research and document every potential issue iii. Decide how to approach the representation
1. Passive cooperation and production of requested documents 2. Aggressive representation, asserting all privileges and requiring the auditor to issue summonses. 3. Balance between the two approaches is ideal.
iv. Assume that the auditor has read the file and is familiar with the potential issues.
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i. Turning information over upon request can build trust and good faith. ii. However, there may be times where the taxpayer or taxpayer’s representative deems the documents to be irrelevant or privileged, and will not want to produce them. In that case, the IRS may pursue its subpoena power.
1. Do not turn over irrelevant or privileged documents solely on the belief they are harmless. Irrelevant documents may lead to new inquiries and privileged documents may constitute a waiver of privilege. 2. Keep the audit as narrow and streamlined as possible.
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d. Handling requests for information or documentation (cont.) i. IRS Subpoena Power
1. The right to summons people to act and documents 2. The IRS may issue summonses or subpoenas for the purpose of “ascertaining the correctness of any return, making a return where none has been made, or determining the liability of any person for any internal revenue tax …” 3. Pursuant to its subpoena power, the IRS may: a. Examine any books, papers, records, or other data that may be relevant or material to such inquiry, and b. Summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the IRS may deem proper to produce such books, papers, records, or other data.
e. Limitations i. Attorney-client privilege and potential waivers; ii. Practitioners’ privilege under I.R.C. ' 7525; iii. Work product privilege; iv. Relevance.
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contact within three days following the contact.
what questions were asked and what information was given.
privileges.
the taxpayer has.
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Appeals officer.
would seek to have considered as exhibits in court.
then partially accomplished!
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i. Fast Track Mediation ($100,000 or less)
a. May be of limited used in estate tax cases. b. Initiate by filing Form 12269, Agreement to Mediate, the examiner’s summary of the issues and tentative tax computations, and the taxpayer’s written position. c. Does not apply to compliance coordinated issues.
ii. Fast Track Settlement (no dollar limit)
a. Initiate by filing Form 14017, Application for Fast Track Settlement, a summary of issues, and the taxpayer’s written position. b. Does not apply if issues will take longer than 60 days to resolve
iii. Post-Appeals Mediation (no dollar limit)
written statement detailing the taxpayer’s position on the disputed issues.
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i. Recall that the SOL cannot be extended. Thus, the IRS may issue a NOD even though mediation with Appeals is ongoing. ii. If a case is unagreed within 210 days of the SOL expiration date
notice of deficiency (i.e., the 90-day letter). iii. Can petition the United States Tax Court without prepaying the deficiency. iv. Can file a complaint in the United States Court of Federal Claims or the appropriate Federal district Court if the tax is prepaid. v. Bring in an experienced tax litigator early, either during the audit, the Appeals conference, or before beginning litigation.
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– IRS issues a Notice of Liability and sues the fiduciary in the appropriate federal district court
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(1) Form 56, Notice Concerning Fiduciary Relationship
when the fiduciary is discharged. (2) Form 4810, Request for Prompt Assessment Under Internal Revenue Code Section 6501(d)
(3) Form 5495, Request for Discharge From Personal Responsibility Under Internal Revenue Code Section 2204 or 6905
liability.
reserves) which
– Agree to indemnify the personal representative from personal liability arising from the distribution; and or – Execute refunding bonds and releases requiring distributees to agree to refund such amounts as are required to satisfy the estate’s debts, including tax debts.
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If the executor in good faith relies on gift tax returns furnished under section 6103(e)(3) for determining the decedent’s adjusted taxable gifts, the executor shall be discharged from personal liability with respect to any deficiency of the tax imposed by this chapter which is attributable to adjusted taxable gifts which—
(1)
are made more than 3 years before the date of the decedent’s death, and (2) are not shown on such returns.
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– Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts – Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under Section 6048(b))
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– Many reportable transactions; examples include: formation of a foreign trust; transfer of property to a foreign trust; the receipt of any distribution by a U.S. beneficiary; aggregate gifts or bequests from foreign person or estate greater than $100,000; loans to a foreign trust.
– Due with tax return for the U.S. grantor or beneficiary (separately filed)
– 35% of the gross value of the distribution received from or transferred to a foreign trust; 5% per month for the amount of certain foreign gifts, up to 25% – Reasonable cause defense available; reviewable in CDP proceedings
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– 15th day of the 3rd month after the end of the trust's tax year
– $10,000 per reportable transaction plus a $10,000 continuation penalty – Reasonable cause defense available; must show current compliance – Able to be reviewed in collection proceeding
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14 Washington Place Hackensack, NJ 07601 (201) 488-5400 FAgostino@agostinolaw.com Lsannicandro@agostinolaw.com
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The group is intended to provide a forum for those taking the Agostino & Associates seminar series. It also provides a forum for the Taxpayer Assistance Corporation volunteers to discuss our pro bono outreach. To join, please email Joann Kozlowski at jkozlowski@agostinolaw.com with your full name & email address.