Get Audited!

Your
CPA is having a tough year. Here are steps you can take to increase the
likelihood of an IRS audit of an estate tax return and the cost of handling the
audit. Go ahead, help your CPA fund his kids’ 529 plans. While some of the
items below might seem odd or silly, according to two IRS Appeals agents these
are some of the most common and easy audit triggers to avoid.

√Use an out of date tax form. This will pretty much
assure IRS attention. Seems rather lame, but according to the IRS, not uncommon.

√Don’t complete both the extension of time to file and the
extension to pay tax on Form 4768 when you file it.

√Don’t attach a copy of the actual fully signed will
and trust of the decedent to the estate tax return. Leave out of the package
key supporting and back up documents and materials.

√Forget to include the complete appraisal for assets
for which appraisals are required. A common goof is to submit the summary of
the appraisal without the full report, or to enclose the complete valuation
report but leave out the exhibits the report refers to.

√Don’t use summary pages and general outlines. In other
words, make it a real hassle for the reviewing IRS agent to understand the
return and find the information they need when making a preliminary assessment.
And definitely don’t provide a table of contents and tabs for a complete
compilation of all exhibits.

√Don’t bother verifying whether the prior gifts
reported is accurate. Ignore the fact that the decedent may have gone to a
prior CPA and filed gift tax returns and that current CPA/attorney doesn’t know
about them. Missing that the decedent had filed prior gift tax return is
apparently such a common goof that some tax experts have questioned whether
there would be a negligence penalty applied for not knowing about the prior
returns. So don’t make any effort to ascertain what was filed. Don’t order past
returns from the IRS tax practitioners’ hotline (you’d need a Form 2848 power
of attorney to do this). Skip filing a request for a transcript for gift tax
returns.

√Whenever you include assets from a joint account on
the decedent’s estate tax return at less than 100% of the value of the account,
don’t bother explaining why less than the entire account is reported in an
attached deduction. For example, if the decedent owned an account “Don Decedent
and Sam Survivor as tenants in common” and only ½ the value is included since
Sam had contributed ½ the assets in the account, don’t attach that explanation
or proof of Sam’s contributions.

√If the decedent had made transfers to GRATs, CLTs and
other planning vehicles, don’t attached detailed calculations and values, just
pop a number on the return and leave it at that.

√When you send a check skip putting a letter “V” at end
of Social Security number to indicate it is an estate check. That way the IRS
computers will assume it is from a live taxpayer, not a decedent and the
likelihood of a mix up will be maximized.

√Don’t file a proper protective claim for refund of
Form 843. The Regulations under Section 2053 prohibit estates from taking an
expense deduction for items that haven’t been paid. What the IRS recommends is
that estates file Form 843 Claim For Refund and write in red on top “PROTECTIVE,”
this will keep the time period in which the estate can file to claim the
expenses once paid (the statute of limitations) open beyond the 3 year period.
Then the estate can file a formal Form 843 claim for refund. Given the
importance of this when you file a protective claim for refund don’t bother getting
it stamped in by IRS, or sent by certified mail, so that you can prove a timely
filing.

√During planning process don’t get copies of all key
documents from clients so that they will be available to submit with the estate
tax return: e.g. patents, contracts, etc.  Leaving out key documents will enhance the
need for the IRS reviewer to seek more info.

√Since
the IRS routinely asks for all Forms 1040 and Forms 1041 for decedents for the
3 years prior to death to look for gifts or other transfers in contemplation of
death. The IRS looks at checks written. They review income from assets, such as
a business or rental property, and then verify that the asset is on the estate
tax return and that the value on the 706 is unreasonably low relative to the
prior distributions or income. You could prepare in advance, and even undertake
this testing and make disclosures on the return, if you wanted to minimize the
issues arising on audit. But hey, why bother.