Checklist of Common Estate Tax Audit Triggers

John Csargo

About nine percent of the estate tax returns reporting gross estates of $5 million or more were audited by the IRS during 2014.  And the bigger the estate the more likely the audit.  In addition, many state revenue agencies have their own team of auditors and actually audit a substantially higher percentage of returns than the IRS.

Some audits can be avoided by filing a complete and accurate estate tax return.  The preparation of the estate tax return should be approached with a view toward an audit; there should be back-up substantiation for every item on the return. But estate tax returns with controversial or technical issues may be audited regardless of how well the returns are prepared.

Here is a list of common estate tax audit triggers; where possible, avoid the triggers as audits can become an expensive part of settling an estate.
  1. Unanswered questions, inadequate descriptions, and missing attachments.
    • If an answer is not given to a required question on the estate tax return, IRS may view this as evidence of a carelessly-prepared return which will usually contain other errors.
    • If descriptions of assets are inadequate, IRS may feel that their reported value can’t be verified.
    • If the estate tax return is filed without required attachments and documents, IRS may presume that the estate tax return itself was prepared without knowledge of what was in them.
  2. Internal inconsistencies.  Consider the estate tax return as a harmonious unit. Examples of internal inconsistencies that can be found on the face of an estate tax return include the following:
    • the will specifically bequeaths certain property, but that property is not reported on the estate tax return;
    • a deduction for real estate taxes is taken on Schedule K of the Form 706, but no real estate is reported on the return;
    • the decedent’s stated occupation was that of farmer, but no farm equipment is reported on the return.
  3. Controversial or technical issues which include:
    • valuation of: an interest in a closely held corporation, especially if marketability and minority discounts are claimed, family limited partnership (FLP), or real estate, especially if a fractional interest discount is claimed; artwork and other
    • revaluation of prior gifts
    • heirs’ claims against the estate
    • tax allocation clauses/interrelated marital or charitable deduction
    • reasonableness of attorneys’ fees or fiduciary commissions
    • the credit for tax on prior transfers or tracking assets from prior estates
    • property in joint name with someone other than the decedent’s surviving spouse, which is excluded from the estate
    • funding of qualified terminable interest property (QTIP) and other trusts
    • basis of appreciated property in non-taxable estates
    • effect of administration expenses on value of interest passing to the surviving spouse for purposes of determining the marital deduction
    • Crummey powers
    • charitable lead trusts
    • retained interests
    • private annuities

Extra care should be taken to answer questions, provide full descriptions and attach support for items listed on the return.  In addition, look for inconsistencies in the documents.  Be aware of the controversial or technical issues and be ready to fully explain the position taken on the return.


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