IRS has announced that, for estate tax returns filed on or after June 1, 2015, estate tax closing letters will be issued only upon request by the taxpayer. It has also clarified whether it will, under various circumstances, issue a closing letter with respect to estate tax returns filed before June 1, 2015.
Background. IRS issues an estate tax closing letter when it concludes that an estate tax return, Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) is accepted as filed or that the required adjustments are completed. In many cases in which an estate tax return is filed, the estate’s personal representative waits until he gets this letter before proceeding to close the estate. The issuance of a closing letter doesn’t terminate IRS’s ability to open/reopen an estate tax audit if there is material misstatement or fraud. See, e.g., Schwager, (1975) 64 TC 78164 TC 781.
Historically, IRS’s “Frequently Asked Questions on Estate Taxes” website has provided that personal representatives can expect a closing letter to be issued within four to six months from the date that Form 706 is filed if the return is without errors or special circumstances. Closing letters for returns that are selected for examination or reviewed for statistical purposes will take longer.
Code Sec. 2010(c) allows the estate of a decedent who is survived by a spouse to make a portability election, which allows the surviving spouse to apply the decedent’s unused exclusion amount to the surviving spouse’s own transfers during life and at death. A surviving spouse may use this amount in addition to his or her own $5 million exclusion (as indexed; for 2015, $5.4 million) for taxable transfers that the survivor made during life or at death. The amount received by the surviving spouse is called the deceased spousal unused exclusion (DSUE) amount.
The personal representative of the estate of the deceased spouse must elect portability of the DSUE amount on a Form 706, which must include a computation of the DSUE amount. Under Code Sec. 2010(c)(5)(A), a portability election is effective only if made on a Form 706 that is filed within the time prescribed by law (including extensions) for filing such return.
In Rev Proc 2014-18, 2014-7 IRB 513, IRS provided procedures under which estates of decedents that died before Jan. 1, 2014, that fall below the dollar threshold for having to file an estate tax return, that failed to file Form 706, and that wanted to elect to take the estate tax portability exclusion, could get an automatic extension of time, to Dec. 31, 2014, to file Form 706 to make that election.
Closing letters only on request. On its website, IRS has announced that, for estate tax returns filed on or after June 1, 2015, estate tax closing letters will be issued only upon request by the taxpayer. IRS asks taxpayers to wait at least four months after filing the return to make the closing letter request.
Closing letters for estate tax returns filed before June 1, 2015. For estate tax returns filed before June 1, 2015, IRS has continued its former instructions that: a) personal representatives can expect a closing letter to be issued within four to six months from the date that Form 706 is filed if the return is without errors or special circumstances; and b) letters for returns that are selected for examination or reviewed for statistical purposes will take longer.
In addition, IRS has indicated that, for estate tax returns filed after Jan. 1, 2015 and before June 1, 2015, its previous policy of issuing closing letters has been changed to reflect the portability rules. For example, no closing letter will be issued for such a return if: a) the estate didn’t meet the filing threshold and the portability election was denied due to a late filing; or b) the return was filed pursuant to Rev Proc 2014-18 and the portability election was denied due to failure to meet Rev Proc 2014-18’s requirements. On the other hand, where such a return was filed, the estate met the filing threshold, and the portability election was denied due to a late filing, a closing letter will be issued.
RIA observation: Given that Rev Proc 2014-18 only applies to returns filed by Dec. 31, 2014, it appears that IRS made an error when it limited the above Rev Proc 2014-18 rule to returns filed after Jan. 1, 2015 and before June 1, 2015. It appears that the rules described in the immediately preceding paragraph are actually intended to apply to estate tax returns filed at any time before June 1, 2015.
References: For estate tax closing letters, see FTC 2d/FIN ¶ T-2001; TaxDesk ¶ 823,507.