Gagliardi on Classification of the Estate Tax Return for Audit

Gagliardi on Classification of the Estate Tax Return for Audit

All estate tax returns are mathematically verified, classified for audit potential, and checked that all required documents are attached. Selected returns are assigned by estate tax managers to estate tax auditors for audit. Certain estate characteristics, coined "audit triggers" by estate planners, increase likelihood of managers and auditors selecting estate tax returns for examination.


     The estate files the Form 706 with the IRS Service Center in Cincinnati, Ohio, where the estate tax return is classified. Classification generally occurs within 60 days of receipt by the estate and gift tax staff from the files area. The classification process determines whether the estate tax return is selected for audit. Unlike screening of income tax returns, trained Service personnel individually assess estate tax returns for audit potential.

     The classification process includes review of the return for computational accuracy. In doing so classifiers will compile any prior Form 709 gift tax returns filed by the decedent, check if real property has been sold, determine if publicly traded stock values should be checked, confirm status of charities or foundations indicated as charitable beneficiaries, obtain returns of a spouse, and verify estimated income tax liability. The classifier also analyzes each schedule for a determination of valuation issues, art issues and emerging issues.

     Given that the classification process includes compilation of prior gift tax returns, when preparing a return the tax professional should obtain all previously filed gift tax returns in order to correctly determine adjusted taxable gifts.

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