Avoiding Gift and Estate Audit Triggers: Anticipating Audit Issues, IDRs, and Appeals

Description

An estate or gift tax audit is different from an income tax audit. Anticipating these unique issues and knowing how to handle a 706 or 709 audit is critical to avoid additional estate or gift tax liability or a reduction in a taxpayer's unified credit. Moreover, properly prepared gift tax returns set the stage for later estate tax savings on death. Although the total number of IRS audits continues to drop, the likelihood of an estate or gift tax return audit is much higher than other returns. In 2019 over 20 percent of estates valued at 10 million or greater were audited.

Finding out that an estate is officially closed and not subject to audit allows the preparer, executor, and beneficiaries to breathe sighs of relief. Advisers and executors can take on every gift and estate return to mitigate the chance of audit and better prepare a return with sticky issues for audit. A thorough internal review can avoid many audit triggers. Missing documentation, vague descriptions, and discrepancies between the will and the 706 can be corrected before the return is submitted. Other triggers, valuation, minority and marketability discounts for closely held businesses, reporting of adjusted taxable gifts, and special elections require more consideration before reporting.

At the onset of an audit, the practitioner must respond to the IDR (Information Document Request). IRC Section 7491 allows the shifting of the burden of proof to the IRS for taxpayers meeting its requirements. These requirements include cooperating with the IRS and its IDRs, which can sometimes be impracticable. Often the next consideration is whether to allow an extension of the statute--what do you give up, and when is this in the taxpayer's best interest? When the taxpayer and IRS disagree, the taxpayer can initiate an appeals conference. When is an appeals conference advisable, and what are the odds of coming ahead in appeals?

Listen as our expert conveys first-hand knowledge of IRS audits of estate and gift tax returns, including issues to expect during 706 and 709 examinations, how to reduce the likelihood of being selected, and how the IRS audit process works.