Estate Tax Audits for Large Estates Are a Virtual Certainty

What you need to know:

Recent audit statistics show that federal estate tax returns are facing increased scrutiny from the IRS.

What you need to do:

Review your estate planning arrangements – particularly those involving transfers of discounted assets to or in trust for family members – to protect against issues that could arise if you are subject to an estate tax audit. 

The substantial federal estate tax exemption ($5.34 million) available under current law provides welcome estate tax relief to the wealthy.  One predictable outcome associated with this higher exemption amount is that fewer and fewer federal estate tax returns are being filed each year.  Unfortunately, however, those estate tax returns that are filed are subject to greater IRS scrutiny than ever before.

According to the Internal Revenue Service 2012 Data Book, in fiscal year 2012 the IRS audited 100% of estate tax returns filed in 2011 for estates with assets over $10 million.  The IRS recommended an average of $819,243 in additional tax due per return for estates in this category.

The estate planning issues and strategies most susceptible to an IRS challenge include property valuations, gifts of discounted assets (such as interests in family LLCs, partnerships or corporations), and other intrafamily transfers.  Several of these techniques provide tremendous planning opportunities when structured correctly, and we do not recommend that clients abandon them simply because of increased IRS scrutiny.   

The recent release of the IRS estate tax audit statistics does remind us, however, of the importance of keeping one’s estate planning affairs in good order.  This is particularly important for large estates that appear destined to be subject to an estate tax audit eventually.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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