The IRS issues an estate tax closing letter once it is satisfied that a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return is accepted as filed and the estate tax liabilities are satisfied. Although the issuance of a closing letter does not terminate the IRS’s ability to reopen an estate tax audit in the case of material misstatement or fraud, it does provide a level of comfort that the required estate tax obligations have been met.
The IRS has recently established a new procedure for issuing estate tax closing letters.
On their web page labeled “Frequently Asked Questions on Estate Taxes,” the IRS announced that for all federal estate tax returns filed on or after June 1, 2015, estate tax closing letters will be issued only upon request by the taxpayer. They will not automatically be sent out as in the past.
Although the IRS asks that taxpayers wait at least four months after filing the return to make the request, they failed to offer much guidance on how to make the request other than to call an IRS helpline. “For questions about estate tax closing letter requests, call (866) 699-4083.”
The IRS claims that the number of estate tax returns being filed has dramatically increased as many estates are filing these returns for the sole purpose of making a portability election.
Internal Revenue Code Section 2010(c) allows the estate of a decedent who is survived by a spouse to elect portability. That allows the spouse to apply the pre-deceased spouse’s unused exclusion to the surviving spouse’s transfers during life and at death.
The amount received by the surviving spouse is the pre-deceased spousal unused exclusion (“DSUE”) amount. In order for this to apply, the estate representative must elect portability of the DSUE amount by timely filing the Form 706.
There are a number of issues or concerns now that the IRS will not automatically be issuing closing letters.
Assuming Form 706 was required to be filed, an executor/personal representative generally waits for the issuance of an estate tax closing letter before making final distributions and closing the estate administration process. Also, it is advisable that an executor obtain a closing letter to protect him/herself against potential liability for taxes the IRS eventually determines are unpaid.
The IRS will also need to address and modify certain rules/regulations that make reference to the receipt of an estate tax closing letter. For example, the election (under IRC Section 645) to treat a qualified revocable trust as part of a decedent’s estate for income tax purposes expires six months after the final determination of estate tax liability. The date of the issuance of an estate tax closing letter is considered an event of final determination of estate tax liability.
Without the release of formal procedures and additional instructions, currently, practitioners can do little more than identify those estate tax returns which are subject to this new procedure, calendar four months from the filing date if a closing letter is desired and await further direction by the Service.
If you have any questions or would like to discuss this matter further, please contact a member of Withum’s Private Client Services Group at email@example.com.
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.