Seven suggestions for IRS estate/gift tax audits.

• Author: New, Lorraine F.

Many practitioners do not often have to deal with estate and gift tax audits and may need information about the process: what the auditor is looking for, what documentation is needed, how best to meet the requirements, or what to do if the taxpayer does not agree with the auditor. This item provides a series of suggestions for tax advisers and taxpayers on how to avoid estate and gift tax audits and how to deal with them when served with an IRS notice.

1. Why Does It Take So Long?

   A major complaint from practitioners is the time it takes to close an audit and get a dosing letter. The initial delay is not the examiner's fault. When estate or gift tax returns are filed, they go to the Cincinnati Service Center, where they are processed, given a document locater number and prepared for classification. Estate and Gift Tax staff review each return and select those most appropriate for audit. Others are held for a period of up to six months. If not selected during that time, they are accepted as returned. This does not mean that all of the values are accepted, only that the return was not selected for audit (and is unlikely ever to be audited). IRS Policy Statement P-8-49 indicates that once a closing letter has been issued, that case will not be reopened unless the grounds are substantial and the potential effect on the tax liability is material. This audit selection process takes approximately six months.

   Selected returns go to a field office, where they are reviewed for audit potential. As workload permits, they are assigned to an examiner, who also makes a determination about audit potential. An auditor should contact the taxpayer (or his or her representative) within 45 days of assignment. The initial letter will request copies of documents to support the information reported in the return (such as income tax returns, business income tax records, appraisals, personal checks or verifications of claims), as well as support for legal positions that may have been taken. Ideally, the auditor should respond promptly to letters or telephone calls, have a face-to-face meeting if appropriate, and meet agree& on deadlines. The taxpayer and his or her representative should do the same.

   The goal is to complete an audit, if possible, within 18 months of filing. There is a three-year statute of limitations on estate tax returns that cannot be extended, so if additional tax must be assessed, it will be done during that period. If additional assets are located or if a mistake was discovered in the original return, amended returns or refund claims can be filed during this three-year period. Refund claims after this time can be made up to two years after payment was made but are limited to the amount of the payment.

2. Be Respectful

   A critical rule is to respect the auditor. Almost all are attorneys and are well experienced. It is fine to disagree, but the tax adviser should consider the examiner's point and ask to review his or...