Executive Summary
For those who are subject to Federal estate taxes, the estate closing letter is a small but essential step in the process of administering an estate. It affirms that the IRS has reviewed and agreed on the Form 706 estate tax return as filed, and is often the last step for an executor to actually close an estate with the probate court.
However, in recent years the IRS has been forced to issue a rapidly growing number of estate closing letters, not to close out the estates of those who actually have an estate tax liability, but nontaxable estate tax returns that were filed solely for the purpose of claiming portability of a deceased spouse’s unused exemption.
To relieve its own administrative burden, the IRS informally “announced” in a recent update to its Estate Tax FAQ that it will no longer automatically issue an estate tax closing letter at all, and instead will require estate administrators to proactively request the closing letter instead.
For those who merely filed the Form 706 estate tax return to claim portability, this change isn’t necessarily a problem, as few in such situations would have requested (or had any need) for a closing letter anyway. However, for those who do face an estate tax, the new process adds yet another step for the estate administrator to manage. And because the estate closing letter can’t even be requested until four months after the Form 706 is filed, the new rules may force taxable estates to remain open even longer – delaying distributions for beneficiaries and racking up administrative costs – before the estate can finally be closed!
What Is An Estate Closing Letter?
An Estate Closing Letter is the formal letter issued by the IRS after a Form 706 Estate Tax Return has been reviewed and accepted by the IRS. (Many states that have a state estate or inheritance tax will have a state-issued estate closing letter as well.)
The primary purpose of an Estate Closing Letter is to affirm that the estate tax return is being accepted as filed, and that the estate is not going to be audited by the IRS (and thus it is also known as an “Estate Tax Closing Letter”). In fact, the primary alternatives to receiving an estate closing letter are a notification that the estate is being audited for a potential estate tax assessment, and/or a Statutory Notice of Deficiency (also known as an SND, or a 90-Day Notice) if the IRS has a specific concern about something reported on the Form 706.
In practice, the primary purpose and benefit of receiving the Estate Closing Letter is that it gives the estate’s executor clearance to wrap up and close the estate, including the distribution of any remaining property that may have been held back as a contingency in case any/more (Federal) estate taxes were assessed against the estate. In some jurisdictions, obtaining an Estate Closing Letter will also be necessary to close out the probate process for an estate, as otherwise the IRS could potentially still be(come) a creditor of the estate.
Historically, once a Form 706 estate tax return was filed, the IRS would review the return and automatically issue an Estate Closing Letter, usually about 4-6 months after the Form 706 is filed. (Although a number of accountants and attorneys administering recent estates have indicated to me that it’s typically taking at least the full 6 months, and sometimes longer, for the IRS to issue the closing letter.)
IRS Eliminates Automatic Issuance Of Estate Tax Closing Letter And Offers Transcript Alternative
In an abrupt shift that was “announced” via a change to the Frequently Asked Questions (FAQ) on its website in mid-June of 2015, the IRS declared that going forward, an estate closing letter will not be issued automatically after the Form 706 estate tax return is filed. Instead, an estate closing letter must be explicitly requested by the taxpayer (i.e., by a representative of the estate, such as the executor). And the request may only occur after a waiting period of at least four months beyond the date that the estate tax return was filed. The new rules will apply (retroactively) to all estate tax returns filed on/after June 1, 2015.
Ironically, though, while the IRS’ update indicated that estate administrators must wait four months to request an estate closing letter, no process was articulated for how to request the letter once those four months have passed! Presumably, the Service will issue subsequent guidance on this in the coming months (as with a four-month waiting period, the first request wouldn’t come any sooner than October 1, 2015 anyway).
Michael's Update: IRS ultimately issued "final" guidance for an estate closing letter. Executors can either request an estate closing letter to be issued to the address of record by calling 866-699-4083 and providing the name of the decedent, his/her Social Security number, and the date of death. Alternatively, the IRS also noted that an Account Transcript will now be viewed as an acceptable alternative to the estate closing letter, as it reflects the acceptance of the Form 706 and the completion of any examinations. An estate's Account Transcript is available online to registered tax professionals using the Transcript Delivery System (TDS) or by filing a Form 4506-T to request one.
Any estate tax returns that were filed prior to June 1 of 2015 will still receive their automatic closing letters within the ‘usual’ 4-6 month time frame, with the caveat that no closing letter will be issued if the estate tax return was filed only for portability purposes (i.e., the estate tax filing threshold was not otherwise met) and the filing was too late to claim the portability election. (The IRS also noted that no closing letters will be issued for estates that tried to take advantage of the one-time “retroactive portability” opportunity under Rev. Proc. 2014-18, if they didn’t actually meet the stated requirements to claim [retroactive] portability.)
Portability Of The Unused Estate Tax Exemption And The Estate Closing Letter
While not outright acknowledged by the IRS, the change to eliminate the automatic issuance of an estate tax closing letter appears to be related primarily to a significant increase in the number of estate tax returns that are being filed to claim portability of the deceased spouse’s unused exemption amount (DSUEA), as the Treasury Regulations for portability require that an estate tax return be filed even if there is no estate tax due and the estate is otherwise below the filing threshold.
As a result of these rules, while in the past only taxable estates (or those estates that would be taxable before available deductions) would have filed returns and automatically triggered an estate closing letter, now a growing number of nontaxable returns (filed only to claim portability) are triggering estate closing letters as well.
And according to IRS Estate Tax Statistics, with portability becoming more popular since it was first implemented in 2011, the number of nontaxable returns (triggering estate closing letters) is suddenly beginning to rise again, for the first time in over a decade, as shown in the table below. In the past year of 2014 the situation was likely even worse (as this data runs only through 2013), exacerbated by the issuance of Revenue Procedure 2014-18, which allowed those who failed to claim portability in the first place (in 2011, 2012, and 2013) to go back and claim it; and more generally, as awareness of portability is finally growing, the number of estate tax return filings is likely to accelerate growth as well.
In other words, the decision to eliminate the automatic issuance of estate closing letters is likely driven at least in part by the recent and prospective growth in nontaxable estate filings being done solely because a Form 706 must be filed to claim portability in the first place. Especially because the reality is that an estate closing letter is largely a moot point in portability situations, as by definition no estate tax was owed in the first place (or there wouldn’t be a remaining exemption to port!)!
Given no final estate tax liability to close out, then, the primary purpose of the estate closing letter would simply be to affirm that the clock is running on the statute of limitations, in case at some point down the road the IRS challenged the values on the estate tax return and the amount being ported. Yet the reality is that under the recently issued Final Treasury Regulations for portability and IRC Section 2010(c)(5), the IRS retains the right to review the original estate tax return and challenge the amount claimed as portability on the surviving spouse’s estate tax return in the future anyway (which means an estate closing letter wouldn’t bring much protection anyway).
Which means in the end, there really is arguably very little reason at all for an estate closing letter for a nontaxable estate that filed a Form 706, even though it’s below the filing threshold, just for the purpose of claiming portability. And given that the majority of estate tax returns being filed are nontaxable, the IRS chose to manage its growing number of ‘unnecessary’ estate closing letters by making any/all estate tax closing letters “on-demand” instead of automatic.
Planning Issues With Closing An Estate By Requesting An Estate Tax Closing Letter Or Account Transcript
Notwithstanding the fact that, as noted above, most estate tax returns being filed today probably don’t actually need an estate tax closing letter, because it’s being done solely for the purpose of portability (where the closing letter doesn’t ‘matter’ very much anyway), the challenge of the IRS’ approach is that it imposes an additional burden on estates that are taxable to obtain what is still usually a very necessary estate tax closing letter!
At a minimum, estate administrators will now have to remember to manually request the estate closing letter from the IRS, with an additional step of either requesting the estate closing letter, or an account transcript, to be done four months after the Form 706 is originally filed. And it remains to be seen exactly what this process will be, as the IRS hasn’t even provided any guidance yet!
In addition, there are some concerns that the IRS may not even begin to review an estate tax return until the closing letter is requested after four months. After all, if an estate closing letter isn’t being requested, it wouldn’t be a prudent use of limited IRS resources to review estates where it may not be necessary anyway, especially if they’re near/below the filing threshold! Yet if the IRS won’t really begin to delve into the estate review process until a closing letter is requested after four months have already passed, it’s not clear how long it will really take to get closing letters in situations where they are necessary. In other words, will the additional step of waiting four months to request an estate tax closing letter, and then waiting additional months to actually get the closing letter, just drag out the time that estates must remain open and in the probate process? This would be problematic, as it both delays the ability of the administrator to make final distributions, and can incur additional administrative costs to the estate itself!
Notably, BNA reports that AICPA’s Trust, Estate, and Gift Technical Resource Panel is already considering whether to ask the IRS to add a “check-the-box” option to Form 706, which would allow executors to request the closing letter at the time the Form 706 is filed (obviating the need to remember to do a timely subsequent request, and alerting the IRS to the need to begin reviewing the estate tax return from the moment it’s filed). It remains to be seen whether this will be pursued and adopted. Though notably, a prior proposal to help address this issue, by simply having an abbreviated version of the Form 706 that could be used solely for the purposes of verifying the deceased spouse’s unused exemption (DSUE) and claiming portability (and one that presumably wouldn’t need an estate closing letter), was already rejected in the final Treasury Regulations on portability.
For the time being, though, with no check-the-box option on Form 706 in existence to request an estate closing letter, and any estate tax returns being filed will – for the time being – have to go through the new manual process the IRS soon prescribes to request the closing letter for closing an estate with a formal request for an estate closing letter or an account transcript. While this may not necessarily be an imposition for the increasing number of estates that are eschewing bypass trust strategies and just filing returns to claim portability instead, the relatively few estates that actually do have an estate tax exposure will have yet another issue to manage and consider. At least, until/unless the IRS comes up with a better solution?
Great information as always. We may also see a rise in 706 filings due to the new requirement under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 for administrators to notify the beneficiaries of the basis of inherited property (so there is consistent reporting between estates and beneficiaries.) I suspect the IRS will be providing some type of 706EZ in the next year or two for estates that don’t have to pay, but have to file.
I sure hope we see a Form 706EZ at some point. No sign of it coming yet, but we’ll see…?
– Michael