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How to Be Prepared for an Estate Audit

Given that only estates with a relatively high asset threshold have to file Form 706, you can understand that the IRS audits a higher percentage of these returns than any other type. Assume that yours will be one of the ones chosen and prepare the return and all its exhibits with that in mind.

This way you save yourself a lot of headache instead of trying to re-create what you did six months or a year after you filed the forms.

Keep the following pointers in mind in case the IRS comes knocking:

  • Get all the appraisals from reputable appraisers so the results will stand up under audit. Each appraiser should know what the IRS expects in an appraisal and should attach his or her credentials to the appraisal for the IRS to see. An appraisal from an unqualified appraiser won’t stand up to scrutiny on audit.

  • If you take a valuation discount for closely held stock, have the calculations done by an expert in the field. Be sure to attach these calculations to the 706.

  • Keep a copy of every piece of paper that you use to determine an asset existed, whose name it was in, and its value. Store these papers in an organized file (a file broken down by schedule is one good way to do it) so you can lay your hands on any given piece of paper that the IRS may require at audit.

    Doing so goes a long way toward making the IRS agent conducting the audit feel that you’ve done a thorough job and have nothing to hide.

If your return is selected for audit, you receive a letter (and sometimes a phone call) from the IRS requesting further information, such as the decedent’s income tax returns for the past few years. If that’s the case, supply the information requested. Usually, the IRS accepts the additional documentation and concludes the audit. After all questions are satisfied, the IRS will issue its closing letter.

If the IRS conducts a larger audit and any issues arise, it is usually a good idea to turn to your tax expert for assistance.

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