Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

The Estate or Gift Tax Return is Filed with the IRS – Then What?

I attended the American Society of Appraisers Advanced Business Valuation Conference a couple of weeks ago and had the opportunity to attend a session presented by an IRS attorney, Theresa Melchiorre. I always jump at the chance to hear an IRS presenter, as I like to get a glimpse of what goes on behind the scenes at the IRS, particularly as it relates to estate and gift taxes. Ms. Melchiorre provided a brief overview of how the estate and gift tax filing process works.

  1. The taxpayer files estate and gift tax returns (Form 706 & Form 709) in Cincinnati, Ohio.
  2. Each return is reviewed by the estate and gift tax staff. Based on certain criteria, it is determined whether the return will be selected to be sent to Examination.
  3. If selected, Examination decides if the return will be audited, and if so, assigns the return to an examiner.
  4. If the return has a business valuation appraisal attached, the examiner determines whether to send the appraisal on for review by an engineer (an engineer is an appraiser). The examiner can request a limited review or a full review of the appraisal.

Statute of Limitations

A statute of limitation is defined by the IRS as a time period established by law to review, analyze and resolve taxpayer and/or IRS tax related issues.

Estate Tax: In general, IRC 6501(a) requires the IRS to assess an estate tax liability within three years after the filing date (or due date, if later) of the estate tax return. The statute of limitations on assessment of estate tax cannot be extended. A deficiency must either be assessed, or a statutory notice of deficiency mailed to the taxpayer, prior to the expiration of the statute of limitations.

Gift Tax: In general, IRC 6501(a) requires the IRS to assess a gift tax liability within three years after the due date of the gift tax return, or three years after the gift tax return was filed, whichever is later. The statute of limitations on assessment of gift tax can be extended, if both the Secretary of the Treasury and the taxpayer agree in writing to do so.

Disagreements Between the Taxpayer and IRS

If the taxpayer wants to appeal an IRS decision and sufficient time remains on the statute of limitations, the taxpayer may go to the Office of Appeals. The Office of Appeals is an independent organization within the IRS whose mission is to help taxpayers and the Government resolve tax disagreements without going to Tax Court.

If there is not enough time left on the statute of limitations, the IRS will issue a notice of deficiency. Once the notice is issued, the taxpayer has the following options:

  1. Pay the deficiency;
  2. Pay the deficiency then apply to the IRS for a refund of taxes paid. If the IRS denies the refund, the taxpayer can sue in District Court or the Court of Claims; or
  3. Do not pay the deficiency and sue in Tax Court.

Chief Counsel attorneys defend the IRS in cases before the Tax Court. Department of Justice attorneys defend the IRS in cases before all other courts.

I hope this article provides some useful information regarding IRS policies and procedures associated with the filing of Forms 706 and 709. For more details on the process, refer to Article 26 §6501 of the Internal Revenue Code and Section 4.25.1 of the Internal Revenue Manual.

By Cindy Andresen, ASA

Sources

Appraisers and Their Responsibilities: An IRS Perspective by Theresa Melchiorre, ASA Advanced Business Valuation Conference, October 19, 2015

Internal Revenue Manual, Section 4.25.1. – www.irs.gov