IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 25. Estate and Gift Tax

Section 1. Estate and Gift Tax Examinations

4.25.1  Estate and Gift Tax Examinations

4.25.1.1  (12-31-2002)
Examination Procedures

  1. This section provides general instructions and direction for classification activities, valuation of securities (service center and area office); surveying returns, and processing generation skipping tax returns.

4.25.1.1.1  (12-31-2002)
Classification of Returns General

  1. The classification guidelines provided by the domicile area (in coordination with the Territory Manager) determines whether a return will be selected for examination.

  2. The estate tax manager advises Service Center's management of classification guidelines.

  3. Workload and Resources will dictate where returns are sent.

4.25.1.1.1.1  (12-31-2002)
Classification of Estate Tax Returns

  1. The Cincinnati Service Center (CSC) will do the following:

    1. Associate the Examination Assembly (Form 5546, Examination Return Charge-Out sheet, and Examination Labels) and any related Forms 709 of the decedent with each estate tax return, and then route returns to the classification center in the CSC for classification in accordance with local instructions.

    2. If a computer-generated Estate Tax Closing Letter is prepared during processing, include it with the estate tax return package before routing to examination.

    3. Identify returns by activity code. Classification responsibilities may be divided between the Compliance function at the CSC and the Territory detailees. The Returns File Unit divides and routes returns according to instructions from Director, Compliance.

    4. Classify returns at the service center using a estate tax attorney, estate tax manager, paralegal, or detailed territory estate tax attorneys according to instructions of the Program Manager for Estate and Gift Tax Territory Managers.

     

  2. The Cincinnati Service Center (CSC) will do the following:

    1. Classify returns within 30 calendar days of receipt from the Files area.

    2. If the return is not selected for examination, stamp to indicate "accepted as filed" by classification. Issue Letter 627,Estate Tax Closing Letter. Close AIMS record and refile at CSC.

    3. For selected returns, update on ERCS/AIMS.

    4. After updating, ship to appropriate Territory within 30 days of selection.

     

4.25.1.1.1.2  (12-31-2002)
Classification of Gift Tax Returns

  1. Estate Tax groups will issue their instructions for the classification of gift tax returns under Headquarters guidelines, with input from Territory Managers.

  2. The Cincinnati Service Center will do the following:

    1. Request and associate the historical file of the donor,if available, for each return selected for examination.

    2. Associate Form 5546, Examination Return Charge-Out Sheet, and Examination Labels with returns before shipment to the groups. Send returns selected for examination to the appropriate field office, accompanied by Form 3210, Document Transmittal, indicating the number of returns included with each shipment. An AIMS status label will be attached to Form 5348 to list the individual returns.

    3. Send returns selected for examination to the field office where the donor resides according to the address shown on page 1 of Form 709.

    4. Workload and Resources will dictate where returns will be sent.

    5. Send returns not selected for examination back to the service center Returns File Unit as soon as classification is completed.

     

4.25.1.1.1.3  (12-31-2002)
Valuation of Listed and Over-the-Counter Securities

  1. The Cincinnati Service Center classification units may verify the valuation of listed and over-the-counter securities as part of the estate and gift tax returns classification process. Classification staffs will use the automated valuation services vendor contracted by Headquarters.

  2. During classification, the classification staff determines which stocks and bonds will be valued. The determination is a matter of judgement, and although no rigid rule applies, check the valuation when:

    • Valuation changes impact the tax liability

    • Large blocks of stocks or bonds are present, and/or

    • There is likelihood of substantial valuation change

     

  3. Estate and gift tax personnel may ask the service center to value specific securities.

4.25.1.1.2  (12-31-2002)
Returns Selected for Examination

  1. The estate tax manager may survey cases before assignment and contact.

  2. The estate tax attorney may survey a case after assignment if it is accepted after consideration of the return and without contact. Contact is:

    1. Talking with or writing to the personal representative, return preparer, or other authorized representative of the estate, or the donor, in such a manner that they are aware that the return is being examined, or

    2. Requesting information which is not required to be filed with the return. The instructions for the returns and Regulations 20.6018–4, 25.6019–3, and 25.6019–4 denote required documents.

     

4.25.1.1.3  (12-31-2002)
Limited Scope Examinations

  1. The Cincinnati Service Center with an estate tax attorney may conduct limited scope examinations of items which are conducive to correspondence (generally those which are the result of a matching program or other issues which do not require significant substantiation by the taxpayer).

    1. If it is determined that the only issue involves the valuation of listed stocks and bonds, as shown by an automated securities valuation report, the return may be examined by correspondence.

    2. To make adjustments, complete reports in accordance with IRM 4.25.1.3.5.

     

4.25.1.1.4  (12-31-2002)
Inventory Management

  1. Generally, examine and complete processing of returns within 18 months of filing.

    1. Initiate estate tax examination within 9 months of filing.

    2. Examinations extending beyond 12 months may require frequent managerial involvement.

    3. Managers ensure that examination beyond the 18 month cycle are within the exception of P–4–52.

     

  2. Generally, examine estate tax returns in the order in which they are filed. Factors to consider:

    • Geography

    • Return complexity

    • Program priorities or initiatives

     

4.25.1.1.5  (12-31-2002)
General Instructions to Estate Tax Attorneys

  1. The Auditing Standards set guidelines for conducting quality examinations.

  2. Reviewers will apply these standards to each case reviewed to determine whether a quality examination has been performed, and whether further examination action is necessary.

4.25.1.1.5.1  (12-31-2002)
Estate Tax Examinations

  1. Examine estate tax returns in a manner that will promote public confidence in the Mission of the Service. (P–1–1).

  2. Use the interview examination method for returns, unless information concerning questionable items appearing on a tax return can be readily furnished by mail.

  3. Except for a limited scope examination, probe for omitted assets and undisclosed transfers.

  4. Maintain monthly examination activity and/or taxpayer contact. Meaningful contact includes:

    1. Discussions with the taxpayer or the taxpayer’s representative which significantly moves the examination toward completion.

    2. Informs the taxpayer of the progress of the examination.

    3. Requests records.

    4. Details matters to be discussed.

     

  5. Practitioners are subject to regulations contained in Treasury Circular No. 230. Initiate a referral to the Director of Practice regarding practitioners who fail to comply with these regulations.

  6. Request internal specialists, outside fee appraisers, and paraprofessional support, when their participation enhances the quality, accuracy, and fairness. However, the estate tax attorney assigned the return under the direction of the estate tax manager is responsible for making the recommendation of tax liability, ensuring conclusions are properly supported by the facts and law, and explaining adjustments to the taxpayer.

  7. Obtain omitted copies of documents and information required to be filed with the return. However, copies of documents should not be obtained and made a part of the workpapers unless they are:

    1. Required to be filed with the return.

    2. Necessary to support adjustments.

    3. Needed for complete explanation of questioned items which resulted in a no-change.

     

4.25.1.1.5.2  (12-31-2002)
Gift Tax Examinations

  1. Field Offices will establish their own guidelines for the gift tax program. Headquarters Compliance Policy may establish additional guidelines.

4.25.1.1.6  (12-31-2002)
Generation-Skipping Transfer Tax

  1. Instructions for processing Forms 706–GS (D–1), 706–GS (D), 706–GS (T) and Schedule R-1.

4.25.1.1.6.1  (12-31-2002)
Service Center Examination

  1. Follow these processing steps:

    1. Pipeline processing will route Forms 706–GS(D), 706–GS (D–1), 706–GS (T) and Schedule R-1 to service center examination for classification. Treat any Form 706– GS(D–1), copy B, received without a Form 706– GS(D) attached as copy A for purpose of this procedure.

    2. Annually, compare the Form 706–GS (D) returns with Form 706– GS(D–1) for a match of the distributee on line 1a of the (D) with the distributee on line 1b, of (D–l), copy A, for the same tax period. Where a match is found, see paragraph 6.

    3. If there is no matching Form 706– GS(D) found, research Master File records (MFT 78) for the filing of a Form 706– GS(D) for the distributee/taxpayer listed on Form 706– GS(D–1), line 1b.

    4. Form 706– GS (D-1) : If no entry is present, establish an account on AIMS non-master file (NMF) using MFT 78, Source Code 44, Activity Code 421, and the distributee’s EIN. The TIN must be followed by an N. The area code is the area servicing the address on Form (D–1), line 1b.( If the designated area is not served by your service center, transfer the NMF account using Command Code AMSOC, entering the appropriate area office code and disposal code 30.) Revise to reflect centralization in the Cincinnati Service Center.

    5. If matching Form 706– GS(D) and Form 706–GS (D–1) are found, verify that the inclusion ratios agree. If the ratios do not agree, associate the Form 706– GS(D) with the Form 706– GS(D–1) and forward to the area office serving the address shown on Form (D–1), line 1b.

    6. Schedule R-1 should be processed as NMF, MFT 53.

     

4.25.1.1.6.2  ( 12-31-2002 )
Office Examination

  1. Follow these processing steps:

    1. Solicit and secure the Form 706– GS(D), if not already filed;

    2. Process the Form 706– GS(D) using delinquent/substitute for return procedures, establishing the return masterfile using MFT 78, Activity Code 421. Close the AIMS NMF account created by the service center;

    3. Determine the correct inclusion ratio and make adjustments to Form 706 GS(D), as appropriate.

     

4.25.1.1.7  (12-31-2002)
Procedure at Conclusion of Examination

  1. Discuss findings with the taxpayer.

  2. Secure Form 890, Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment Estate, Gift ,and Generation-Skipping Transfer Tax, if the taxpayer agrees, and solicit payment for deficiencies.

  3. lf the taxpayer does not agree with the proposed adjustments:

    1. Solicit and consider a formal statement of the taxpayer’s position on each unagreed issue before concluding the examination, and

    2. Explain the procedure for administrative appeal as well as the option to pay any deficiency and file a claim for refund if the taxpayer or taxpayer’s representative is not knowledgeable regarding these procedures.

    3. Provide with appropriate Publications and Notices.

     

4.25.1.2  (12-31-2002)
Estate Tax Credits and Deductions

  1. This section provides information on estate tax credits and deductions.

4.25.1.2.1  (12-31-2002)
Estate Tax Credits and Deductions

  1. Even as to unagreed reports, evidence of actual payment of state death taxes need not be secured when the area director is satisfied that local enforcement procedures for the collection of state death taxes are adequate. Procedures followed in the areas, incident to the verification of payment, may vary depending upon whether:

    1. The state has a pick-up tax equal to the Federal credit.

    2. A separate inheritance tax determined without regard to the Federal tax, or other death duty.

    3. The area has an effective program for exchange of information with the State taxing authority.

     

  2. If the area director is not satisfied with local collection procedures, or where there is information from the state taxing authority that indicates the full amount of the credit will not be paid, he/she should establish procedures for verifying all credits claimed in the area.

    1. Request credit evidence if not furnished by the taxpayer within six months after return is filed;

    2. On examined returns, allow the full amount of the credit on Form 1273 Report of Estate Tax Examination Changes.

     

4.25.1.2.2  (12-31-2002)
Personal Representative Commissions and Attorney Fees

  1. Before allowing deductions for reasonable unpaid commissions to personal representative or fees to attorneys:

    1. Obtain executed Form 4421 (Declaration Executor’s Commissions and Attorney’s Fees) from the executor.

     

  2. Prepare Form 5346 (Examination Information Report):

    1. Include a complete description of income and the year received.

    2. Attach copy of Form 4421 to Form 5346.

     

4.25.1.2.3  (12-31-2002)
Charitable Gifts and Bequests

  1. To determine if an organization is tax exempt check:

    • Publication 78 (Cumulative List of Organizations).

    • The records of exempt organization rulings maintained by the Area Director.

    • A copy of the Tax Exemption Letter.

     

4.25.1.3  (12-31-2002)
Report Writing — Estate Tax Examiners

  1. This section provides information on report writing — estate tax examiners.

4.25.1.3.1  (12-31-2002)
Overview

  1. Section 4 provides guidelines for the preparation of various forms used in estate and gift tax reports.

4.25.1.3.2  (12-31-2002)
Estate Tax Preplanning and Examination Workpapers (Form 5225)

  1. Indicate on Form 5225 any large, unusual, or questionable items that should be verified, any significant items that should be verified, and any significant items that should not be verified (such as a large asset passing as part of a charitable deduction). Use this to make preexamination determinations:

    • Examine or survey.

    • Scope of audit.

    • Request specialized assistance or activities.

     

  2. Use Form 9984, Examining Officier's Activity Record, cover sheet as an activity record and show:

    1. When forms and significant documents were sent or received.

    2. Internal contacts.

    3. Taxpayer contacts indicating the type of contact (by phone, in IRS office, or at taxpayer’s office).

    4. Any other significant contacts or activities

     

4.25.1.3.3  (12-31-2002)
Form 3232, Examining Officier's Report Transmittal

  1. Form 3232, Examining Officer’s Report Transmittal, supplies the Area Director with information necessary to close the examination and issue the closing letter.

4.25.1.3.3.1  (12-31-2002)
Form 1273, Report of Estate Tax Examination Changes

  1. Form 1273 contains a summary of the adjustment in tax and a computation of the estate tax.

  2. The maximum credit for state death taxes should be computed and tentatively allowed unless precluded by an iminent statute of limitations date. If complete evidence has been submitted, the amount allowable is indicated in the "as corrected" column, Line 13.

  3. If evidence substantiating the credit is incomplete, the total credit figure is entered in the block entitled "as corrected." The portion of the credit which has not been substantiated is entered in the blank entitled "Tentatively allowed credit." Where this box is used, enter same date shown on Form 890.

  4. Form 1273 compares the correct tax with the tax previously assessed and indicates the net deficiency or overassessment. Though the first column is entitled, "as shown on the return," the figures to be entered here are the last assessed amounts, which may differ from the figures on the return.

4.25.1.3.3.2  (12-31-2002)
Miscellaneous Forms

  1. Use Form 3233, Report of Gift Tax Examination for gift tax examinations.

  2. Use Form 886–A, Explanation of Items, in estate tax or gift tax reports to explain in detail each adjustment shown in the columns headed "As Returned" and "Corrected" . Explain each schedule with adjustments individually, and in alphabetical order. A paragraph following the computations on each schedule should explain adequately to the taxpayer the basis for each adjustment.

  3. Include Form 3229, and Form 3229–A, Computation of Credit for Tax on Prior Transfers, and Form 4808, Computation of Credit for Gift tax, (if applicable) in Part II, when there is an adjustment in the amount of credit claimed. Attach appropriate schedules and computations to show the net value of the transferred property and/or other items which require explanation.

4.25.1.3.4  (12-31-2002)
Access to Forms

  1. For a quick reference of forms, see Forms Package, Training 3129–24.

  2. The Estate and Gift Tax Workcenter includes the Estate and Gift Tax Reports, as well as other applicable forms.

4.25.1.3.5  (12-31-2002)
Reports

  1. A partially agreed case report requires:

    1. An agreed report shows the agreed changes "As Corrected " on Form 1273, using the figures returned by the taxpayer as "Shown on Return" .

    2. An unagreed report shows, on Form 1273, the unagreed changes " As Corrected" using the figures agreed upon in your first report reflected in "Shown on Examination Report dated___."

    3. A Form 5344, Examination Closing Record, for each report.

     

  2. A no-change case report requires:

    • Form 3232 (Examining Officer’s Report Transmittal)

    • Forms 1273 and 886A (if nontaxable changes made)

     

4.25.1.3.6  (12-31-2002)
Claims

  1. Taxpayers may submit claims for refund of estate tax:

    1. Form 843 ,Claim For Refund and Request For Abatement.

    2. A subsequent Form 706 which reports less tax liability than shown on the original return;

    3. Or in any other form of writing (an informal claim). The procedure for handling formal and informal claims is the same.

    4. An oral request either by telephone or interview is not considered a claim, formal or otherwise.

     

  2. Taxpayers may file a claim for refund abd bring suit for estates for which an election under IRC 6166 has been made (see IRC 7422 (j)).

4.25.1.3.7  (07-31-2002)
Election of Installment Payments

  1. When the estate has timely elected, and qualified, to pay the estate tax on the installment basis (see IRC 6166) the estate tax attorney must:

    1. Complete Form 4349, Computation of Estate Tax Due With Return and Annual Installment. This form must be submitted on all examined or surveyed returns. In a partially agreed case, use only the agreed figures. Form 4349 verifies the deferred tax computation on all IRC 6166 cases.

    2. Indicate by checking the appropriate boxes on Form 4349 that audit action has been completed and that the election is valid. Also note on the form if any of the qualifying assets have been sold or liquidated.

    3. Prepare Form 4351 ,Interest Computation—Estate Tax Deficiency on Installment Basis, upon completion of audited cases.

    4. Forward the following documents to the CSC, Estate & Gift Tax Installment Unit, Stop 824G:

      • the first three pages of the Form 706 with original request for election.

      • Form 4349.

      • Form 4351 with Cammack or other interest computation.

      • Audit Report.

       

     

4.25.1.3.8  (12-31-2002)
Transferee Liability Cases

  1. Invoke transferee liability provisions in estate and gift tax cases in situations when:

    1. Statute of limitations has run on transfers made by a donor, but is still open with respect to the donee-transferee (i.e., between 3 and 4 years after the due date of the return or filing date, whichever is later).

    2. A deceased donor failed to file a gift return and the property was distributed.

    3. A transfer will jeopardize the collection of tax.

    4. There has been no administration of decedent’s estate, but the property was distributed.

     

  2. The burden of proof is upon the Government in transferor-transferee cases.

  3. The file should contain:

    1. Date or dates of each transfer;

    2. The fair market value of the property transferred and to whom transferred;

    3. Evidence, preferably in documentary form, and a detailed description of all material not in the file;

    4. Name and address of transferee and present ability to pay.

     

  4. Prepare a report for the transferor and each transferee.

4.25.1.4  (07-31-2002)
Miscellaneous

  1. This section provides information on miscellaneous.

4.25.1.4.1  (12-31-2002)
Overview

  1. This section contains instructions for processing matters unique to estate and gift tax examinations.

4.25.1.4.2  (12-31-2002)
Exchange of Information Pursuant to Death Duty and Gift Tax Treaties