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IRS Changes Procedure on Issuing Estate Tax Closing Letters

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Jul 9th 2015
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The IRS has quietly changed its policy on issuing estate tax closing letters.

Last month, the agency indicated in its FAQs section that taxpayers will now have to request the closing letters for all estate tax returns – Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return – filed on or after June 1. The IRS will no longer automatically send out the closing letters.

Taxpayers should wait at least four months after filing the return to make the request. That's to allow for processing, according to the IRS.

Taxpayers who filed before June 1 will be issued a letter. But they can expect to wait four to six months for it, provided there are no errors or other special circumstances, according to the agency.

So why did the IRS make the change? According to an article on WealthManagement.com, it has to do with portability.

Internal Revenue Code Section 2010(c) allows the estate of a decedent who is survived by a spouse to elect portability. That allows the spouse to apply the deceased partner's unused exclusion to the surviving spouse's transfers during life and at death.

The amount received by the surviving spouse is the deceased spousal unused exclusion (DSUE) amount. The estate representative should elect portability of the DSUE amount on Form 706, according to an article on Thomson Reuters' tax and accounting site. And according to Code Section 2010(c)(5)(A), that election is effective only if its on Form 706 and filed within the deadline.

According to a June 23 statement, the IRS contends that the filing of estate returns has increased, as many estates are filing for the sole purpose of making a portability election, according to the WealthManagment.com article.

Though that may indeed be using more of IRS staffers' time, regulations also allow the agency to examine the deceased spouse's estate tax return even after the deadline has passed for determining portability for the surviving spouse, wrote Kenneth Pun and James Dougherty of WealthManagement.com. So, they contend, the new closing letter requirement “is akin to cracking a nut with a sledgehammer.”

What's more, making estate executors request the closing letters may well stall estate settlements, they wrote.

Will the IRS issue additional instructions? We shall see.

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