September 06, 2013 /24-7PressRelease/ -- Estate planning and taxes: The dreaded estate tax audit---
Article provided by Mathis, Marifian & Richter, Ltd.
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The estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The total of all of these items is your "gross estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Once you have accounted for the gross estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "taxable estate."
First, some good news: The 2013 exemption applicable to the federal estate tax is $5,250.000. That means that there is no need for an estate tax return for estates with combined gross assets and prior taxable gifts totaling less than $5,250.000. For decedents dying in 2013 with estates greater than $5.25 million, an estate tax return must be filed.
The likelihood of an audit
Recently, the IRS issued its Service Data Book summarizing its activities for its fiscal year, which ran from October 1, 2011, to September 30, 2012. A rather startling statistic emerges: The IRS scrutinized estate tax returns more than any category of individual tax returns, at close to a 30 percent rate of examination. The 12,582 estate tax returns filed in tax year 2011 had a 29.9 percent rate of audit by the IRS; estates with assets of $5 million up to $10 million had a 58.6 percent rate; those with assets of $10 million or more had an effective 116 percent rate of audit, as the IRS also examined previous year's returns. During fiscal year 2012, the IRS assessed almost $26.9 billion in civil penalties.
The staff at the IRS service center where the return is filed reviews every return by hand. The returns are screened for audit potential at three levels: at the IRS Service Center; the district level; and by an auditor, who is often an estate tax attorney. If audit potential is determined at one level it moves up the chain for additional review. The audit process begins with a letter notifying the client that the return has been selected for examination. There is a three-year statute of limitations from the date the return is filed for the assessment of additional taxes.
Throughout each of the screening phases, the IRS looks for returns that contain at least one issue that will result in a material change in tax liability. There are some common audit issues, referred to as audit triggers, among them failure to attach all the required documents to the return, and math computation errors or internal inconsistencies.
In filing an estate tax return, the primary goal is to avoid an audit in the first place and open the more pleasant federal estate tax closing letter. Given the significant possibility of an estate tax audit, the advice of an experienced estate tax attorney is important; if you are unlucky enough to get an audit notice, such representation is critical.
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