A federal estate tax closing letter shows that the IRS has either accepted an estate tax return as filed, or after audit final adjustments have been agreed to. They do not close the statute of limitations, but provide comfort to executors that they can make distributions or pay creditors with little likelihood of IRS review of the estate tax computations.
In the past, closing letters were automatically issued. Earlier this year the IRS indicated that would no longer happen – taxpayers now need to specifically request a closing letter, and must wait at least 4 months from filing of the estate tax return before making the request.
The IRS has now indicated on its website that an estate tax transcript can be used as an alternative method for taxpayers to determine that the IRS has accepted an estate tax return or closed an audit. More particularly, the IRS provides:
“Transaction Code 421 [on a transcript] indicates an Estate Tax Return (Form 706) has been accepted as filed or that the examination is complete. Please note that the Transaction Code 421 explanation will display "Closed examination of tax return" in all instances. If Transaction Code 421 is not present, the tax return remains under review.”
The IRS goes on to provide how taxpayers or their representatives can request a tax transcript from the IRS (either online or via the mail). It also notes that “[t]he decision to audit a Form 706 is typically made four to six months after the filing date. Please wait four to six months after filing Form 706 before submitting a request for an account transcript.”
Since many probate courts require an estate tax closing letter before closing an estate when an estate tax return is filed, it remains to be seen whether an IRS estate tax transcript will be accepted as a valid substitute for those returns.