Estate Tax Dispute Procedures

By | July 9, 2002

It is a widely held belief that one of the most unfortunate circumstances in modern society is to have a tax return selected for audit by the Internal Revenue Service (Service). Estate tax returns are subject to audit and adjustment like any other tax return.

Under current law, an estate tax return must be filed by the Personal Representative of the estate of every U.S. citizen or resident whose gross estate exceeds $675,000. The return must be filed no later than 9 months after the date of the decedent¡¯s death unless an extension has been granted.

As a general rule, the Service has 3 years from the date the return is filed to assess additional tax against the estate. It is possible, then, that the estate may not receive an estate tax closing letter from the Service until nearly 4 years after the decedent¡¯s death. In practice, however, the Service will usually, within 9 to 15 months from the date it receives the return, send the estate either an estate tax closing letter or a notice that the return will be audited.

For estates over $3,000,000, the marginal rate of tax is 55 percent. Hence, the larger the estate, the more money the government will earn on any adjustments in the government¡¯s favor resulting from audit. Once a return is selected for audit, it is assigned to an estate tax attorney within the Service for examination. The purpose of the examination is to verify the basis for the tax computation, as well as the legality of the positions taken on the return. If the estate and the auditor reach agreement, an estate tax closing letter will be issued once payment of any additional liability is received and processed.

If an agreement cannot be reached at the audit level, the estate will receive a letter from the Service setting forth the proposed adjustments and informing the estate of their appeal rights. The estate will then have 30 days to file a written appeal with the Administrative Appeals Office of the Service. The appeals office is independent of the office in which the case is audited. The appeals office function is to assess the hazards of litigation. Hence, the appeals office generally has authority to settle cases based on potential litigating postures and the likely outcome of a trial. If the estate cannot resolve the case at the appeals office, a statutory notice of deficiency will be issued to the estate offering the estate the opportunity to file a petition with the United States Tax Court.

The estate can, within 90 days, file a petition with the United States Tax Court if the estate has not paid the tax. Alternatively, the estate can pay the tax, file a claim for refund, and if the Service does not act on the claim for refund within 6 months, file a refund suit in the United States District Court or the Court of Federal Claims.

Due to the heavy case load in the federal court system, however, a final verdict in a tax trial may take 2 to 3 years. Consequently, an estate could be opened for many years after the decedent¡¯s death because of the lack of an estate tax closing letter from the service.

The process of resolving disputes with the Service is fraught with obstacles. Choices made at the audit level could, in fact, be detrimental at a later stage in the process. Therefore, if the Service notifies you that a return is being selected for audit, it is extremely important to consult a tax professional to assist you.

Courtesy of: Steven W. Tarta, Attorney at Law. 45 N. Broad Street Ridgewood, NJ 07450 PHONE 201-444-8448 E-MAIL: [email protected] Fax 201-612-0827Please be sure to check out www.tartalaw.com for estate planning learning center information.
Author: Steven W. Tarta, Esq.

Steven W. Tarta, Attorney at Law. 45 N. Broad Street Ridgewood, NJ 07450 PHONE 201-444-8448 E-MAIL: [email protected] FAX: 201-612-0827 Please be sure to check out http://www.tartalaw.com for estate planning learning center information.

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