Lessons Learned After IRS Proposes User Fee for Estate Tax Closing Letters

Executors as well as the personal representatives of estates can be held personally liable for either applying or distributing estate assets when there are unpaid estate taxes owed in case the Internal Revenue Service is not paid. When estate tax returns are not filed, the final amount of estate taxes due is not determined until either the statute of limitations expires or an audit occurs. Consequently, estate fiduciaries are left uncertain about whether or when an adjustment to estate taxes will occur if the Internal Revenue Service has accepted an estate tax return as filled. 


This type of response is unfair to both fiduciaries and beneficiaries because the most fiscally responsible fiduciaries can hold back on distributions until the amount taxed is more certain. To assist fiduciaries in assessing whether tax is due, an estate tax return is filed with the IRS. These returns are often issued following review by the Internal Revenue Service and a decision about not to audit or following the completion of post-audit procedures or litigation. 


The Role of Estate Tax Closing Letters


Estate tax closing letters are form letters that the Internal Revenue Service sends after Form 706 has been both reviewed and accepted. Form 706 is a lengthy return that an estate executor files after a person’s death. These forms determine the amount of estate tax due in accordance with IRS Code Chapter 11. Form 706 is also utilized to determine generation-skipping taxes. Closing letters allow estates to settle as well as close probate. Estates cannot do so unless estate taxes have been resolved and an estate is large enough these taxes. The requirement to file Form 706 as well as receive a closing letter depends on the gross estate value. While the Internal Revenue Service has altered this amount over the year, in 2019 the amount was $11.4 million.


The Motivations Behind the Decision


The Internal Revenue Services stopped automatically issuing these decisions a few years ago. This decision was motivated in part as a cost-saving decision and because the Internal Revenue Service believed that fiduciaries could access the same information as a closing letter by assessing whether the transaction code and explanation of “421 – Closed examination of tax return” was entered on the estate’s tax transcript. Because fiduciaries, local probate courts, and others have begun to rely on the convenience of estate closing letters and the explanation contained within, estates can still request a closing letter if they want one. 


The continuing challenge of responding to these requests as well as the continuing volume of estate returns has resulted in a $67 user fee to request a closing letter, which the Internal Revenue Services hopes will decrease the associated costs. While the fee is not particularly high, the government’s decision to palace fees is always a challenge. “Fee creep” is also a concern, which involves the gradual increase of modest government fees. 


Speak with an Experienced Estate Planning Attorney


The estate planning process is full of challenges, and one of the best ways to navigate these obstacles is to obtain the assistance of a skilled attorney. Contact Ettinger Law Firm today to schedule a free case evaluation. During a free case evaluation, an attorney will review your various available options to achieve your estate planning goals.

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