Overview
The receipt of a closing letter from the IRS for an estate is often the last step in the process of closing an estate with the local probate court. The letter affirms that the IRS has reviewed Form 706, agrees to the information contained therein (valuation, etc.) and will not audit the estate. The receipt of the closing letter is a critical step in the process of administering a decedent’s estate.
The IRS used to automatically issue estate closing letters, but will no longer do so effectively for all estate tax returns filed after June 1, 2015. In an estate tax FAQ posted on the IRS website, the IRS announced the change. Estate administrators will have to request the closing letter. For taxable estates, the rule change adds another step in the management of a decedent’s estate and will likely cause an additional delay in closing an estate and increase administrative costs.
Impact of Portability
In recent years, the IRS has been issuing a significantly higher number of closing letters. Not only do estates with a tax liability require a closing letter, but the IRS has also been issuing closing letters for non-taxable estates where Form 706 has been filed solely for the purpose of “porting” over the unused exclusion at the death of the first spouse to the surviving spouse. The IRS claims that these non-taxable estates also need a closing letter to start the statute of limitations running on any future challenge of the value of the amount being ported. But, is that true? I.R.C. §2010(c)(5)(B) gives the IRS the power to challenge the ported amount on the surviving spouse’s estate tax return. That provision states as follows:
Notwithstanding any period of limitation in section 6501, after the time has expired under section 6501 within which a tax may be assessed under chapter 11 or 12 with respect to a deceased spousal unused exclusion amount, the Secretary may examine a return of the deceased spouse to make determinations with respect to such amount for purposes of carrying out this subsection.
That provision would appear to make a closing letter largely immaterial for an estate that has no estate tax liability and the only reason Form 706 is filed is to elect portability.
Procedure
In the FAQ, the IRS said that the closing letter cannot be requested until four months after Form 706 is filed. That’s a significant change. Under the prior process, the closing letter would automatically be issued approximately four to six months after Form 706 was filed. Now, IRS probably won’t even begin reviewing Form 706 until the closing letter is requested which, at its earliest, would be 13 months after the date of the decedent’s death. So, taxable estates may end up being open longer than in the past, distributions to beneficiaries will be delayed and administrative costs will likely rise.
The closing letter is to be requested by calling 866-699-4083 and the decedent’s name is to be provided along with the decedent’s Social Security number and date of death.
Update
In early December, the IRS announced on its website that for estate tax returns (Forms 706) filed on or after June 1, 2015 that account transcripts can be substituted for an estate closing letter. The IRS said that registered tax professionals that use the Transcript Delivery System (TDS) can use the TDS to request and receive account transcripts. Also, authorized representatives that use Form 4506-T can use the TDS if a Form 2848 (Power of Attorney) or Form 8821 (Tax Information Authorization) is on file with the IRS. In its guidance, the IRS said that if Transaction Code 421 appears on its website for an estate, that will indicate that the Form 706 has been accepted as filed or that the exam is complete. IRS also noted that a transcript can be requested by fax or by mail via Form 4506-T to be mailed to the preparer's address.
Conclusion
It really doesn’t make much sense for a non-taxable estate to receive a closing letter. It also makes little sense for the IRS to make the issuance of estate closing letters be anything other than automatic. A simpler approach would have been for the IRS to either create a different Form to be filed by non-taxable estates to elect portability (a concept that was rejected in the final portability regulations) or add a check-box on Form 706 (also rejected by the final portability regulations).
Again, the procedural change is effective for estate tax returns filed after June 1, 2015.