Tips For Filing a Real Estate & Gift Tax Return

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1 ESTATE & GIFT TAX PROCEDURE BY MARTIN E. BASSON Supervisory Attorney, Estate & Gift Tax SB/SE, Area 5, Territory II Internal Revenue Service All section references are to the Internal Revenue Code ( IRC ) unless otherwise indicated. IRS refers to the Internal Revenue Service; ETA, to IRS estate and gift tax attorney; OIC, to offer in compromise; PRO, to problem resolution program; SPF, to special procedures function; TAMRA, to the Technical and Miscellaneous Revenue Act of 1988, Pub. L. No , 102 Stat. 37; FLP, to family limited partnership; and RRA 98 to the IRS Restructuring and Reform Act of A. Introduction 1. This outline is intended to give the tax practitioner a general overview when he/she is involved with the filing of a United States Estate (and Generation-Skipping Transfer) Tax Return, or Form 706 as it is commonly called. I will also discuss various procedural matters concerning the United States Gift (and Generation-Skipping Transfer) Tax Return, or Form 709. Although the IRS Estate and Gift Tax Program is monitored at a National level, the actual procedures can, and do, vary from office to office. My background as a manager both the South Florida and in Manhattan office, Regional Program Manager (Estate and Gift, Engineering/Valuation) for the North-Atlantic Region, and as a member of the IRS National Advisory Panel in the Estate and Gift Tax area, allows me to cover a wide variety of topics. However, it must be pointed out that my guidelines are broad and offices do change their actual operating procedures on an ongoing basis. 2. Note that some of the opinions expressed during my presentation may differ from IRS policies in other offices, and should not be cited as binding on the Service. There is case law on this subject (for a recent case see Vinson & Elkins, 99 T.C. No. 2) indicating that statements made in speeches at conferences or seminars by high-ranking IRS officials can be relied upon for guidance by professionals in carrying out their duties. In case there is any doubt, I am not a high-ranking official. Perhaps the most valuable portion of this outline is the listing at the end of all estate and gift tax managers throughout the United States. This listing is current (as of July 2002), and should assist you in making contacts to resolve your problems wherever they may exist. I can appreciate the frustration you may feel when trying to speak to the right real person when attempting to resolve a problem for your client. The Service has made major inroads in the area of improving customer service during the past several

2 years, and our managers are prepared to assist you in resolving a wide variety of problems.

3 B. Filing the Return 1. If the return is not hand carried to the local IRS office, it should be mailed to the Internal Revenue Service Center in Cincinnati, Ohio (actually located in Kentucky). All returns for estates of non-resident aliens (Form 706NA) should still be filed with the Philadelphia Service Center. Questions concerning the audits of these can be answered by our International Operations Estate Tax Group, based out of Washington, D.C. Their address and telephone number is given at the end of this paper. Important Note In 2001 the IRS changed the filing procedures for estate and gift tax returns. After 12/31/01, all estate and gift tax returns should be mailed to: Cincinnati Service Center 2001 W. Rivercenter Blvd. Covington, KY Or: Internal Revenue Service Cincinnati, OH International returns (those of non-resident aliens, Form 706 NA) will continue to be filed at the Philadelphia Service Center. 2. Note that the IRS constantly revises Form 706. Use the most current form, but the IRS will accept a return if an earlier version is used. 3. As of July 10, 2002, a special telephone line has been established to assist practitioners in obtaining information regarding estate and gift tax returns. This number goes directly to our staff at the Cincinnati Service Center. They can assist you with status of returns, billing problems, closing letter issues, etc. The toll free number is: (no technical questions, please) C. Practical Suggestions 1. The following are some routine safeguards you may want to take when filing a Form 706: a. If you are fairly certain your taxpayer will be audited, and the representative, books and records, and the issues are in a jurisdiction other than where the decedent was domiciled at death, a cover letter should be prepared requesting a transfer. This may expedite such

4 request if it meets IRS policy guidelines.. b. When hand carrying the Form 706 to a district office, always have the receiving individual date stamp both a dated cover letter as well as a copy of the return. Make certain your cover letter specifies any payments being made with the return. These two items combined should quickly resolve any potential errors in the areas of late filing and/or late payment penalties. 2. When mailing the return to a service center, always mail it return receipt requested. The same should be done with all Forms 4768, Application for Extension of Time to File. a. If for some reason you miss the legal filing date, mail the return as early as possible after that date. The longer you wait to file after the due date has passed, the more difficult it will be to have the penalties abated. b. Be aware that even if the service center abates these penalties, they can be reimposed by the estate tax attorney who is assigned to the case if it is determined that they were erroneously abated. c. Be certain to attach all required supplemental documents to the return. These items include a certified copy of the last will and testament, Forms 712, copies of Forms 709, Forms 706CE, trust instruments, powers of appointment, death certificate, and state certification of payment of death taxes. If you are using a photocopy of a canceled check as proof of payment of state death taxes, be sure to include a copy of both sides of the check. If these documents aren t filed with the return, receipt of a closing letter could be delayed. d. It is extremely important to check, recheck, and then check one more time that the social security number on the face of the return is correct. Nothing delays the processing of a return as much as an erroneous social security number. The number of returns filed with transposed social security numbers is surprisingly high. e. Never mail an estate tax return and a gift tax return under the same cover letter with the two returns attached to one another. There is a chance that only the top return will be processed. f. Always make certain you write the name of the estate (or donor) and the social security number on any check for payment of taxes. Checks should now be made payable to the United States Treasury (although checks to the IRS will still be accepted).

5 D IRS Processing of the Return 1. Estate and gift tax returns are filed and initially stored at service centers. Some local offices classify (review for audit potential) these returns at the service centers, while others classify them locally. Classification is performed by an experienced estate tax attorney. All estate tax returns are individually reviewed to determine their audit potential. This 100% review (unique to estate tax returns and in some local offices, gift tax returns) assures that all returns worthy of audit are selected and forwarded to the appropriate local office. New: Returns at the Cincinnati Service Center will be partially reviewed by paralegals. 2. A project was conducted several years ago to determine if an artificial intelligence system could be successfully developed to select estate tax returns for audit. It was not successful, and all returns are still individually reviewed. 3. The IRS has converted to a system of having all estate and gift tax returns filed at one centralized location. This grouping of returns in a single location will make it easier for both the practitioner and the Service to locate historical records. This is necessary because of the increased mobility of our society and the need since 1977 to review all prior gift tax returns before being able to file an accurate estate tax return. The Cincinnati Service Center, located in Covington, Kentucky, is the centralized filing site. 4. If practical, a qualified employee will be designated to make a preliminary screening of all estate tax returns to determine if the necessary documentation is attached to the return. If items are missing, action will be initiated to obtain the necessary information (this is known as perfecting a return). If requests for additional information go unanswered, the return is forwarded to the appropriate local office for follow-up/audit. 5. All prior gift tax returns filed by the decedent should have been associated with the Form 706 before it reached the classification section. However, this does not relieve the executor of his/her obligation to include copies of prior Forms 709 with the estate tax return. 6. If you have any reason to believe that the decedent filed prior Forms 709 which you and the personal representative do not have copies of, your local Taxpayer Service Division (and in some cases the estate & gift tax group) will mail a transcript to the authorized representative showing which years our records indicate a return was filed. A request for copies can then be made to the appropriate service center using Form Without prior gift tax returns, it may be impossible to file an accurate Form 706. The inclusion of these prior gifts on line 4 of Form 706 (adjusted taxable gifts after December 31, 1976, other than gifts which are includible in decedent s gross estate) is one of our most common audit adjustments. An accurate figure on line 4 may preclude the initiation of an audit. 7. If a return is accepted as filed at the classification level, a closing letter will be issued