TAX CHECKLIST: IRS Estate and Gift Tax Appeals

[Martin Shenkman, CPA, MBA, JD]

Estate and gift tax examinations and appeals likely will increase as the government seeks to raise revenues and increase badly needed IRS funding. The tone of proposed legislation, discount constraints, possible restrictions on GRATs and more might encourage the IRS to pursue gift and estate tax audits more aggressively. The following checklist will prepare you to handle these audits.

 WATCH DEADLINES
When an IRS examination concludes, the IRS will issue a 30-day letter setting forth its proposed determination. If the client doesn't want to accept the results, you can file a protest with Appeals. Another option is to request that the IRS issue a 90-day letter, after which the tax can be paid and you can sue for a refund in the U.S. Court of Claims or a U.S. District Court. Alternatively, if the tax is not paid, then you can file a petition in the U.S. Tax Court. Watch the deadlines carefully.
 FORM 2848
Early consideration should be given to powers of attorney. Additional Forms 2848 may be needed for other advisers brought into the case to assist you with the Appeals process.
 USE A COMPREHENSIVE APPROACH
Prepare as if you're taking the case to Tax Court even if you're only presenting it at Appeals. Use a comprehensive information the IRS has about the income and assets of decedent/donor. This should include Forms 1099, W-2, K-1 and 1099-B, as well as brokerage statements. Compare these documents to the Form 709/706 or the data reported on the forms. Obtain detailed explanations from the client about each particular asset and the implications of the income data. For example, K-1s from a partnership whose interests were given away should be evaluated in the context of their implications to the appraisal of the partnership interests.
 INCOME TAX RETURNS
When preparing for a gift or estate tax audit, review three years of income tax returns. Be certain you can explain every asset indicated in those returns that does not appear on the estate tax return or that may impact the gift tax return.
 FREEDOM OF INFORMATION ACT (FOIA)
Consider making FOIA requests to identify additional
 FORM 4810
Code Sec. 6501(d) authorizes an executor to file a request with the IRS for prompt assessment of income or gift tax liability of a decedent, or income tax liability of an estate. The executor files the request on Form 4810 — "Request for Prompt Assessment Under Internal Revenue Code Section 6501(d)" — with the IRS office where the return was filed. The Form 4810 must detail the following: type of tax, periods covered, taxpayer name, social security or EIN, and the date the returns were filed. You need letters of administration or comparable authority to act on behalf of the estate. To expedite the process, the executor may attach copies of the tax returns in question to Form 4810. This shortens the statute of limitations for the return filed from three years from the date of filing (or the due date of the return) to 18 months from the date of the filing of Form 4810. The shorter statute of limitations does not affect the unlimited statute of limitations for fraud or the six-year statute for tax returns with substantial omissions.
and broad approach with a detailed written report, and if appropriate and feasible, incorporate visual presentations (schematics, PowerPoint, etc.). Don't rely only on the information used at the examination level as it may be incomplete. Instead, gather additional information from the IRS, third-party sources and the client to expand your analysis. Taking a cost-conscious approach at Appeals and not going "all out" because it is not Tax Court could undermine your case from a strategic perspective. Presenting a thorough case at Appeals might convince the IRS of the strength of your case and the hazards of it proceeding to trial. This can encourage a more favorable settlement on appeal.
 APPRAISALS
If the value of gifts or bequests is a significant unresolved issue following the examination level, consider obtaining completely new and independent appraisals for any significant assets. Although expensive, obtaining new appraisals — especially if there are issues with the initial appraisals prepared for filing with the original tax returns — will provide objectivity and resolve issues raised by the IRS at the examination level.
 REVIEW SUPPORTING INCOME TAX DATA
Even for gift or estate tax audits, obtain wage and income transcripts from the IRS and other third-party data concerning the case. The FOIA files may identify, for example, witnesses interviewed by the IRS who had different opinions than those taken by the IRS.
 CODE SEC. 2204
This provision authorizes an executor to make a written application for discharge from personal liability for the estate tax. The purpose and procedure for the application is similar to the request for prompt assessment for income tax under Code Sec. 6501(d). The IRS has nine months from the filing of the application, if filed after the estate tax return, to notify the executor of any estate tax due. After the nine-month period, the executor is discharged from personal liability for any estate tax deficiency.
 CODE SEC. 6095
This provision authorizes an executor to apply for discharge of personal liability for a decedent's income or gift taxes and for the estate's income taxes. The executor files the request by letter or on Form 5495 — "Request for Discharge from Personal Liability Under Internal Revenue Code Section 6905" — after the return is filed. The IRS has nine months from the date of filing to notify the executor of any adjustments to the return. This can ensure prompt determination of any assessment and speed the closure of an estate.
 CODE SEC. 6013
The Secretary may disclose the return of any taxpayer or return information with respect to the taxpayer to any person the taxpayer designates in a request for disclosure. Return information can include: "any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability." This information could prove important to your preparing for the Appeals conference. File Form 4506 to request information from the tax returns for each entity and taxpayer affected by the audit. This step will identify what was actually filed. (Sometimes the documentation you have on file or the documentation the taxpayer provides is not what the IRS reflects as having been received). Some portions of the IRS administrative files pertaining to the returns might be discovered in this process.
 CODE SEC. 7517
If the IRS proposes an estate or gift tax adjustment, the taxpayer is permitted to obtain copies of any documents that the IRS possesses relating to the particular case. Documents in the IRS's possession may include appraisals and transcripts of accounts detailing who has worked on each return and file.
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