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Saturday, January 02, 2021

IRS Is Proposing a User Fee for Estate Tax Closing Letter

Executors and personal representatives of estates of decedents can be held personally liable for distributing or applying estate assets when there are unpaid estate taxes due, if the IRS does not get paid. When an estate tax return is filed, the final amount of estate taxes due is not known until either the statute of limitations expire, or there is an audit (possibly followed by ongoing dispute, resolution through Appeals, and/or litigation). The estate fiduciaries are thus in the dark about whether or when an adjustment to the estate taxes will be forthcoming, or if the IRS has accepted an estate tax return as filed. This is unfair to the fiduciaries, and the beneficiaries, since a prudent fiduciary will need to hold back on distributions until the tax amount is more certainly known.

So as to assist the fiduciaries in determining if tax is or will be due, when an estate tax return is filed the IRS has traditionally issued an estate tax closing letter when an estate tax return has been filed. This is generally issued after the IRS' review of the return and determination not to audit or after completion of post-audit procedures or litigation.

Several years ago, the IRS stopped automatically issuing them. This was done in part as a cost-saving measure, and because the IRS believed that fiduciaries could obtain the same information as a closing letter by determining if the transaction code and explanation of "421 - Closed examination of tax return" was entered on the estate's tax transcript.

However, since fiduciaries, local probate courts, State tax departments, and others had come to rely on the convenience of estate tax closing letters and the explanations they contained, estates could still request a closing letter if they wanted one. This request could be made by telephone or fax  - but presently only by fax due to COVID-19 operational restrictions.

Noting the continuing burden of responding to these requests, and the continuing volume of estate tax returns (in part due to the portability rules and the need to file estate tax returns to obtain the benefits of portability), the IRS is now proposing, via proposed regulations, a $67 user fee to request a closing letter to help it defray costs.

While the fee amount is not outrageously high, it is always irksome when the government charges members of the public before the government will discharge its duty. In this case, that is particularly so since it is the liability that the government imposes on fiduciaries (both in their fiduciary capacity and their individual capacity) that necessitates a closing letter.

A secondary concern is fee creep. We have all seen modest government fees increase over time to unreasonable amounts. Look no further than the fees charged for private letter rulings - these at one time had no fee, then a small fee, and now bear fees in the many thousands of dollars.

As of now, the fee is only proposed. Stay tuned.

Proposed Regulation Section 300.13

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