On September 28th, the Treasury Inspector General of Tax Administration (TIGTA) issued a report (here) recommending changes to fix the procedures the IRS uses to select estate and gift tax returns for examination.
By way of background, all estate and gift tax returns are filed on paper and are processed at the IRS Cincinnati, Ohio/Covington, Kentucky Campus. The Campus staff reviews all estate Forms 706 to determine if all filing requirements have been met and if there are any issues pending. After this review, the return will either be classified at the Campus for possible examination or may be accepted as filed and sent to the Campus for processing. The estate and gift tax returns that are selected for examination are sent to the field to be completed by examiners who specialize in estate and gift tax. IRS examinations of returns determine if assets, expenses, and credits are being reported accurately. The Issue Management System (IMS) is used to manage the examiner’s workload for all estate and gift tax cases. The IMS is designed to obtain and retain examination information in a centralized location, including all documents that support conclusions or provide detail on the audit trail of the examination.
The IRS closed 5,030 estate or gift tax return examinations in 2016. The recommended additional tax after examination for all cases was over $1 billion.
Highlights of the TIGTA report include:
1. The IRS’s procedure for selecting estate and gift tax returns for examination are
inconsistent and lack managerial oversight. A single employee prioritizes cases
selected for examination during classification sessions and assigns these cases
to the field for examination, and a lack of documented managerial reviews over the
processes poses risks. While the report found no evidence of bias in the selection of
returns for examination, there is a risk of bias with only one gatekeeper. In 47% of the
estate exam cases reviewed and 46% of the gift tax exam cases reviewed, documen-
tation guidelines were not followed in the case selection process.
2. The IRS lacks clear standards or guidance on when it is advisable to propose and
issue notices of deficiency in estate and gift tax examinations that contain alternative
positions. “In order to protect the Government's interest, in some examinations in which
the IRS and the taxpayers cannot agree on the legal or factual basis for the adjustment,
the IRS may propose alternative theories in proposed deficiencies and notices of
deficiency in order to prevent being ‘whipsawed’ by related taxpayers in the same
transactions in which taxpayers may take inconsistent positions on tax returns”. Without
clear standards there is a greater chance that the government may assert
unsubstantiated or unsupported positions in notices of deficiency, which creates risks
for both taxpayers and the government. The practice makes it difficult to determine the
true compliance impact of the estate and gift tax program, increases the risk of error on
the part of the government and taxpayers, and subjects the government to suits for
The report makes several recommendations which were accepted by the IRS including:
a. Update the Internal Revenue Manual (IRM)to include detailed guidance for the
classification, prioritization, and assignment processes.
b. Consider changes to the gatekeeper function and internal controls so that one
person does not make all of the final examination referral decisions.
c. Require that quality standards be documented for the national gatekeeper’s work
and that managerial reviews are conducted and documented to ensure that estate
and gift tax cases are being properly prioritized for examination assignment.
d. Conduct a review of the Estate and Gift Tax Program’s examination selection
process to identify process improvements to achieve improved compliance results.
e. Ensure that Estate and Gift Tax Program managers complete the Manager’s Quality
Checklist for Closing Cases to verify that all applicable documentation is included in
the IMS case file and that the IMS case file does not include unrelated taxpayers’
documents. If documentation is not included in the IMS case file, the manager
should verify that the missing documentation is included in the hard copy case file.
f. Ensure that managers verify that key documents are created and included in the
case file by the required IRM time frames.
g. The Director Examination, Small Business/Self-Employed, should consider
developing guidance on the circumstances in which it is advisable to propose
and issue notices of deficiency in estate and gift tax examinations that
contain alternative positions.