4.25.5 Technical Guidelines for Estate and Gift Tax Issues

Manual Transmittal

July 29, 2016

Purpose

(1) This transmits revised IRM 4.25.5, Estate and Gift Tax, Technical Guidelines for Estate and Gift Tax Issues.

Background

This section provides guidelines for special examination procedures used in Estate and Gift Tax case examinations.

Material Changes

(1) This transmittal reissues existing procedures. Editorial changes have been made throughout this IRM. Website addresses, legal references, and IRM references were reviewed and updated as necessary.

(2) IRM 4.25.5.1.1.4, Verify Required Filing Checks is an new section that provides a cross reference to IRM 4.10. Estate and gift tax examinations have also required filing checks. Paragraphs 1 and 2 provide citations to the existing filing check requirements that the estate and gift tax program shares with SBSE examinations. Paragraph 3 contains a new filing check that is unique to the examination of estate tax returns. This filing check is the result of the newly published Form 8971. The filing check for Form 8971 returns is effective for estates filed on or after July 31, 2015.

(3) The bullet list following IRM 4.25.5.2.2(2) was revised to provide clarified examples of actions documented in the case Form 9984, Activity Record.

(4) IRM 4.25.5.3.7(3) was revised with updated hyperlinks to SBSE Examination’s Issue Lead Sheet IRM. Additionally IRM 4.25.5.3.7 was revised to include a note after paragraph (3). This note provides a cross-reference to the SBSE Examination Workpapers IRM.

(5) Exhibit 4.25.5-2 was revised to clarify Information Management System (IMS) electronic administrative case file upload requirements.

Effect on Other Documents

The August 6, 2015 version of IRM 4.25.5 is superseded.

Audience

This section contains instructions and guidelines for Small Business/Self Employed Estate and Gift Tax Specialty Programs employees.

Effective Date

(08-05-2016)

Alfredo Valdespino
Acting Director, Specialty Examination Policy
Small Business/Self-Employed

Obtain and Review IDRS Transcripts and Prints

  1. The Integrated Data Retrieval System (IDRS) was designed to provide the most current information on tax accounts in an efficient manner. The system includes account data stored on Master File.

  2. Procedures for requesting IDRS research are established locally based on the availability of IDRS users.

  3. IDRS data reflects various codes that track the cycle of a tax return from the time it is originally filed until it reaches a permanent storage area. This includes any activity on the tax module.

  4. The group secretary, examiner, and group manager are all responsible for the proper coding of the activity on the account while the return is assigned to the group.

  5. This section will provide guidance on obtaining and verifying information on the Master File using IDRS transcripts and prints.

  6. Document 6036, Examination Division Reporting System Codes Booklet, and Document 6209, IRS Processing Codes and Information, serve as a reference for the codes and indicators in this section.

Verify Information from IDRS Data

  1. This section will identify and define IDRS command codes commonly used to verify tax account information in estate or gift tax examinations.

Verify Statute Date
  1. At the time a case is assigned, an examiner is required to verify the statute of limitations by comparing the original tax return received date and postmark date with the statute date reflected on Master File.

  2. The statute of limitations is to be calculated pursuant to IRC 6501.

  3. The Statute Verification Lead Sheet available in the Estate and Gift Notebook Job Aid (Notebook) will assist in verifying the statute.

  4. Two digit alpha codes located in the "day" portion of the Statute of Limitations on Master File indicates there are special circumstances surrounding the statute.

  5. The use of BMFOLT and/or AMDISA prints will be necessary to verify the statute date.

    1. A BMFOLT will provide the examiner with the statute date of record (next to Assessment Statute Expiration Date (ASED)). It will also reflect the due date (next to RET DUE DT), any approved extensions (TC 460 under VARIABLE DATA), and the received date (TC 150 under VARIABLE DATA) on Page 1. The extension may be requested by the taxpayer by filing a Form 8892 or a Form 4868.

    2. An AMDISA will reflect the current statute date of record at the top left of the print next to ASED. It also reflects the date the return was received in the middle of the page next to RET-RECVD-DT.

  6. The chart below may be used as a guide to calculate a statute date:

    Returns Without Filing Extensions: Statute Runs From:
    Return mailed and received on or before due date Due date of return
    Return mailed and received after due date Date return received
    Return mailed on or before due date but received after due date Due date of return
    Returns With Filing Extensions: Statute Runs From:
    Return mailed and received on or before extension date Date return received
    Return mailed and received after extension date Date return received
    Return mailed on or before extension date but received after extension date Postmark date of return
  7. If the statute date on ERCS is incorrect, complete and submit Form 5348, AIMS/ERCS Update, to the group manager for approval, then to the group secretary for input.

  8. If the statute date is correct on Master File, no further action is necessary.

Verify Assessments and Payments
  1. At the time a case is assigned, an examiner is required to verify any assessments and payments made to the account by comparing the original tax return with a transcript of the tax account.

  2. The verification of the assessments and payments should include the amounts indicating whether any tax, interest, or penalties are owed at the time the examination begins.

  3. Command code BMFOLT will provide current data on the account activity.

  4. An unofficial spreadsheet for use when reading transcripts is available on the Estate and Gift SharePoint.

Verify AIMS/ERCS Codes
  1. The Audit Information Management System (AIMS) is a computer system used by Appeals, Examination, and TE/GE to control returns, input assessment/adjustments to Master File, and provide management reports. While the return is charged to Estate and Gift, the AIMS database tracks its location, age, and status.

  2. Every Estate and Gift employee is responsible for ensuring the accuracy of the AIMS database.

  3. This section will identify codes common to Estate and Gift Tax examinations, along with the IDRS command codes used to secure the current information reflected on Master File.

  4. The following IDRS transcripts and prints will be helpful in verifying account information. An examiner may request prints for one or all of the command codes listed below if they are not already in the file or if they are more than 60 days old:

    • AMDISA (Data on current audits)

    • BMFOLT (Instant transcript of tax module)

    • BMFOLI (List of online modules for a taxpayer)

    • CFINK (Information on Power of Attorney for an entity)

    • INOLES (Entity information such as name, address, date of birth, date of death, and scrambled SSNs)

    • MFTRA Type C and Type E (Overnight transcript request for complete account data for a specific SSN)

    • MFTRA Type M, 51 (if applicable) (Overnight transcript request for all Gift Tax returns filed by a taxpayer)

  5. The following codes should be verified by the examiner at the start of an examination:

    • Activity Code

    • Aging Reason Code

    • Project Code

    • Source Code

    • Status Code

    • Tracking Code

  6. A full list and explanation of the common codes used in Estate and Gift Tax examinations is available at IRM 4.25.14.10, AIMS/ERCS Codes in Estate and Gift Tax Examinations.

Required Filing Checks
  1. Required filing checks are necessary to ensure voluntary compliance. Examiners should determine that taxpayers are in compliance with all federal tax return filing requirements and that all returns reflect the substantially correct tax. Required filing checks are documented on the return specific Mandatory Case Examination Lead Sheet, and administrative case file workpapers. See IRM 4.25.5.3.3 through IRM 4.25.5.3.5 below for information regarding each case specific mandatory examination lead sheet. Required filing checks and related return research will vary based on the facts of each case.

  2. IRM 4.10.5.2, Examination of Returns, Required Filing Checks, General Guidelines provides definitions and background information. Additional information on required filing checks can also be found at:

    1. IRM 4.10.5.3 - Prior and Subsequent Year Returns,

    2. IRM 4.10.5.4 - Related Returns,

    3. IRM 4.10.5.6 - Information Returns,

    4. IRM 4.10.5.7 - Information Returns and Forms Involving Foreign Entities, and

    5. IRM 4.10.5.8 - Report of Foreign Bank and Financial Accounts (FBAR)

  3. In addition to the filing check requirements discussed in paragraph (2), examiners are required to complete a filing check to ensure timely filing of Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent.

    1. Beginning June 30, 2016 estate Executors will be required to file Form 8971. As a result of this new filing requirement, estate tax return examinations will include a filing check for estate tax returns filed on or after July 31, 2015. If the return was due on or before July 31, 2015, but is filed after July 31, 2015, the Form 8971 rules and requirements also apply to that return. See 1.6035-1(d)(2). An executor of an estate or other person(s) required to file Form 706, Form 706-NA, or Form 706-A (hereinafter referred to collectively as Form 706) under sections 6018(a) and 6018(b) or a qualified heir required to file Form 706-A under section 2032A, if the return is filed after July 2015, and whether or not that form is filed timely, is required to file Form 8971, and Schedule(s) A with the IRS and to provide each beneficiary listed on the Form 8971 with that beneficiary’s Schedule A. The IRC 6035 filing requirement for Form 8971 and Schedule(s) A does not apply to estates filing to only elect portability of DSUE or make an allocation or election respecting generation skipping transfer taxation. The Form 8971 is due 30 days after the filing of Form 706.

    2. To determine whether the Form 8971 was timely filed the examiner must secure a BMFOL transcript. The transcript will show a 971 transaction code and a 368 activity code if the Form 8971 was filed.

Related Returns Necessary for Examination

  1. This section provides guidance on securing related tax returns to assist in an examination of an Estate or Gift Tax return.

  2. Prior to the classification of an estate tax return, an attempt is made by the Estate and Gift Campus Operation (Campus) to associate any and all related gift tax returns filed by the decedent.

  3. After classification of gift tax returns, an attempt is made by the Campus to associate any and all related gift tax returns filed by the donor for all selected returns.

  4. When historical gift tax returns or closed estate tax returns are associated with either an estate tax return or a gift tax return, they will not be controlled on ERCS unless the controls are initiated by the examiner.

  5. If a related gift tax return is not in the file at the time of assignment, follow IRM 4.25.5.1.2.1, Obtaining Historical Gift Tax Returns (Form 709), to secure the return.

  6. If a related estate tax return is necessary for reference in an examination, follow IRM 4.25.5.1.2.2Obtaining Estate Tax Returns (Form 706) for Reference, to secure the return.

Obtaining Historical Gift Tax Returns (Form 709)
  1. Historical gift tax returns are stored at a consolidated site in Independence, MO referred to as the C-Site. They are filed in alphabetical order based on the original Service Center in which they were filed.

  2. A Document Locator Number (DLN) is assigned to a Form 709 at the time of processing; however, gift tax returns are not stored in DLN order. The first two numbers of the DLN are used to identify the location at which the tax return was filed. This is helpful when attempting to locate gift tax returns filed before 2004.

  3. Gift tax returns are stored for 75 years.

  4. It is important to conduct IDRS research prior to submitting a request for a historical or closed estate tax return.

  5. The Retrieving Historical Gift Tax Returns Job Aid is available on the Estate and Gift SharePoint and should be used in all instances when a historical gift tax return is needed to be retrieved from files. The Job Aid provides instructions for securing historical gift tax returns.

Obtaining Estate Tax Returns (Form 706) for Reference
  1. Related estate tax returns (Form 706), including a predeceased spouse’s return, may provide valuable information on a current examination.

  2. Closed estate tax returns (Form 706) are stored in DLN order in Federal Records Centers (FRC) around the country. They are retained for 75 years.

  3. It is important to conduct IDRS research prior to submitting a request for a closed estate tax return.

  4. A Job Aid titled Retrieving Estate Tax Returns for Reference is available on the Estate and Gift SharePoint and should be used in all instances when a historical estate tax return is needed to be retrieved from files. The Job Aid provides step by step instructions for securing historical estate tax returns.

Issue Management System (IMS)

  1. Issue Management System (IMS) is a computer-based system that is used to manage the examiner’s workload and complete timekeeping for estate and gift tax cases. IMS is designed to obtain and retain examination information in a centralized location on the IMS Server.

  2. Information is uploaded to the IMS Server through synchronizations. Summary, ERCS, Case and Time Sheet Synchronizations must be performed weekly if actions were taken on the case since the last synchronization. However, it is recommended that synchronizations be performed more often.

    Note:

    IMS 3.9.3 allows users to create auto-synchronization configurations that create automatic case data synchronizations.

  3. The Issue Management System Estate and Gift User Guide, is located in the IMS program, the IMS Job Aid, updates and alerts are located at the Estate and Gift SharePoint.

Creating a Case in IMS

  1. A new case can be created in IMS through the ERCS Case Inventory or through a manual case entry. See Estate and Gift SharePoint.

  2. IMS will generate a Case Tree when the case is created. The Case Tree contains auto-populated Case Attributes. The Case Attributes menu option in each Case Tree contains options for the management of Entities, Team Members, and Issues. The Case Attributes apply to all returns included in the case folder.

  3. IMS has features that allow the user to customize the grids displayed on several of the screens. Once the grid is customized, IMS will show the information for all cases in that format.

Entities – Related Returns
  1. The Entities section of the case tree is used to show the returns in the case.

    1. The entities screen is where returns can be added or copied for a case. ERCS update forms can be created, and data can be exported from the case into IMS from the Estate and Gift Notebook Job Aid (Notebook). See IRM 4.25.6.1, Notebook Job Aid.

  2. The Return section of the case tree is used to view all returns in a case.

  3. The Returns screen is also used to merge manually added returns with an ERCS record in IMS and to add a Form 5344, Examination Closing Record, Form 5351 , Examination Non-Examined Closings, and Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties ,when required, prior to closing a return off IMS.

Team Members and Taxpayer Contacts
  1. The Team Members (IRS) screen is used to add, edit, and remove contacts from returns on the case.

  2. IRS Team Members can be added and assigned case issues.

    1. Team Coordinator permissions are not automatically given to IRS Team Members, but may be granted to each Team Member as appropriate. Team Coordinator Permissions are managed from the Case Attributes screen.

  3. Taxpayer contacts

    1. The taxpayer contacts portion of IMS is where authorized personal representative contacts are added so they are displayed on the Form 9984, Examining Officer’s Activity Record. Only one contact can be listed on the Form 9984 as the Taxpayer and the Taxpayer’s Power of Attorney.

    2. Taxpayer contacts need to be checked-in for the Export Data from IMS to Notebook command to work.

Revenue Protection Codes (RPC)
  1. Time spent examining claims is tracked using three different tracking codes. These codes are referred to as "Protection of Revenue Base" (P of RB). Time spent examining the P of RB issues is separate from regular examination time. The P of RB indication in ERCS allows tracking of claim examinations. On IMS, these indicators are Revenue Protection Codes (RPCs). The three codes are:

    1. N − Used when there is no filed request for refund." N" applies to regular examination activities prior to any request for refund. Once there is a request for refund, all subsequent time charges should be made to either "P" or "R" .

    2. P − Used to record time spent protecting the revenue base (i.e., working the claim issue). Examiners cannot charge "N" and "P" for the same return. However, N can change to a P during an examination.

    3. R − Used to record time spent examining regular (non P of RB) issues on returns where a request for refund has been filed. ERCS allows time charges to "P" and "R" for the same return on the same day.

    Note:

    Once an examiner charges either" P" or" R" time to a return, ERCS will no longer allow "N" time to be charged. The "N" time charges become invalid and will be converted to "P" . Once a protection code issue is identified, IMS users should refer to IMS Help under "Update RP Code" for assistance.

  2. The issue must be checked out to edit the Revenue Protection Code (RPC) in IMS.

  3. Charging time to "P" and "R" does not change the process for requesting an update to the return for claim purposes. Although IMS will allow the correct P of RB codes to be input, the items ERCS needs to update the return are not included. See IRM 4.25.9, Requests for Abatement, Claims for Refund, and Doubt as to Liability in Estate and Gift Tax Cases.

Standard Audit Index Number (SAIN) Codes
  1. Time is charged to the issues identified in the case. Issues are classified in two ways: by selecting a Standard Audit Index Numbers (SAIN) and a number from the Uniform Issue List (UIL). Generally, the SAIN relates to how an issue is reported on a return. Tracking issues using both the SAIN and the UIL number will allow the IRS to plan and allocate resources more efficiently. Consequently, at least one SAIN and one UIL number must be selected for each return within a case. Employees will use their professional judgment to determine the appropriate SAIN codes to apply to the case issues. SAIN codes will be entered for case issues, however, workpapers will be associated with the Administrative SAIN code. Employees may charge time to the Administrative issue. However, where an examining employee spends a significant amount of time on a particular issue the time charge should be associated with the SAIN code for that issue. In situations where a case is not started on IMS and therefor time needs to be entered retroactively, these time charges may be input in IMS in blocks of up to 99 hours, and a specific SAIN code need not be identified.

  2. All returns must have the following SAIN Code issues added on IMS. An Administrative Issue (EG080) and Case Issues (Classified Issues for Issue Tracking and Feedback Form purposes) are required on all cases. An Administrative Issue (EG080) is created automatically. All case issues (classified issues) for the return and major issues that were not classified in the case file (i.e., any issues in the case that resulted in significant time expenditures regardless of change that was not identified during classification) must be added.

  3. Administrative Issues and Case Issues may be established for the Team Coordinator or assigned to other team members. From the Add Issue screen, select the team member to be assigned to the issue from the drop-down list. IMS defaults to the user adding the issue and can be changed by clicking the drop-down list and selecting a different Assigned Team Member.

  4. Once an examiner’s referral request to engineering is accepted and assigned, the examiner should add the assigned Engineer as a team member within IMS using the following steps:

    1. The LB& I employee should be assigned a "Referral to Specialist Issue" (SAIN EG081) issue.

    2. Enter a UIL code that best represents the referred issue. Do not use UIL "00001.06-00 – Estates and Trusts." For a short list of UIL codes recommended by Engineering Services see "IMS 3.8 Estate and Gift User’s Guide, Appendix F: Adding LB&I Employees to a Case."

    3. Consult with the assigned LB&I employee about the number of days to enter in the Original Days Assigned field when assigning the Referral to Specialist issue.

  5. In the Add Issue Screen, enter the date the examination began in both the Start Date and End Date fields. Both dates should be the same. Having the dates consistently entered will keep the detailed case issue(s) from being displayed when time is entered into the timesheet screen.

Uniform Issue List (UIL) Codes
  1. The UIL number relates the issue or SAIN to the applicable primary section. If not already populated in the Add Issue screen, add a UIL code that corresponds to the Issue or select UIL "00001.06-00 – Estates and Trusts" . A UIL Code is required to close all cases off IMS.

    1. The Search UIL screen enables users to find the correct UIL code for the issue without scrolling through the entire UIL listing. To limit the number of UIL codes displayed, enter a Code section in the Code box and/or a description of the issue in the Description box and click on the Search button. Select the appropriate UIL code for the issue from the grid and click OK to add the UIL code to the issue. Access this screen by clicking the Find UIL button on the Add Issue or Issue Details screen.

    2. UIL "00001.06-00 – Estates and Trusts" is the default UIL code for most non-engineering Estate and Gift Tax examination issues.

Establishing the Actual Closed Date
  1. A case may have multiple entities and each entity or return can close at a different time. There are two types of "Actual Closed Dates" - one date for the case and another date for each entity on the case. For the return that has been closed, close the case on the "Edit Entity" screen.

  2. A Form 5344, Examination Closing Record, must be generated for each entity within IMS, before an actual closed date will be accepted for the case.

Time Sheet and Form 9984 Activity Record

  1. The Time Sheet window allows the IMS user to enter the various categories of time applied. Time may be entered as direct examination time or below the line time.

    Note:

    Time can be in increments of 0.3 = 15 minutes, 0.5 = 30 minutes 0.7 = 45 minutes, or in hourly increments

  2. The Form 9984, Examining Officer’s Activity Record, is used to document each action taken on the case. Documentation should include the date, location, time charged, and an explanation of each activity or contact. The activity record should provide a complete and concise case history. Recordation of events should be made by examiners or other employees responsible for activity on the case (e.g., group managers, engineers, clerical staff, team members, group secretaries, etc.)

  3. Information recorded on Form 9984 should include, but is not limited to:

    • Date case received.

    • Documentation of all significant actions taken on the case. Significant case action should occur at least every 45 days. See IRM 4.25.1.5.1(2) for a definition of significant activity.

    • Explanation of all delays and time gaps.

    • The examination start date. The examination should begin within 45 days of case receipt.

    • Documentation of the initial contact letter mailing date. The initial contact letter should be mailed within 45 days of case receipt. The examiner should document any reasons for not timely mailing the initial contact letter.

    • Notate whether the taxpayer was provided Pub 1 and Notice 609 upon initial contact.

    • Discussions with the taxpayer regarding their rights.

    • Work performed prior to, during, and subsequent to the initial taxpayer contact, including a general outline of research activities conducted.

    • Documentation of any tour or site visit of the taxpayer’s business or real property.

    • Brief summaries of telephone conversations. However, lengthy telephone conversation notes should be filed under the Communications tabs.

    • Documentation of all contacts with taxpayers, representatives, and third parties.

    • Causes for any delays by the Service (training, details, etc.), the taxpayer, and/or representative. Examiners must ensure that they have notated and explained any delays, causes of delays, and whether or not delays were communicated to any of the affected parties (explain any lack of communication).

    • Group manager involvement (including informal discussions, formal discussion, in-process case reviews, on-the-job-visitations, and workload reviews, manager plan to close meetings, managerial approval for deviations from IMS document upload requirements, fraud awareness, and penalty assessments/abatements, etc.).

    • Documentation when collateral requests and referrals (e.g., Engineering or Art Appraisal Services) are made or accepted, when work begins, and when progress reports are received.

    • All actions with respect to the statute of limitations (e.g., verification, steps to protect the statute of limitation, Form 895 completion date(s), and consents to extend) should be fully documented in the Form 9984.

    • The date the draft report was issued and the response date.

    • Document that a Pub 3498 was issued if required in order to close the case. See IRM 4.25.10.1.1 (2)(a).

    • Documentation of the date when the examiner notified the taxpayer of their recommendation to close the case as a No Change, when appropriate.

    • If a No Change No Adjustments report was issued, the examiner should confirm "NO CHANGE SUBJECT TO CHIEF, ESTATE AND GIFT TAX APPROVAL" language was included on the face of the report, when appropriate.

  4. The Team Coordinator may obtain copies of other team members' (engineers, other examiners assigned to the case, etc.) Forms 9984, Activity Record, through the IMS team website.

Uploading Documents to IMS

  1. All documents which support conclusions reached or provide detail on the audit trail that have been created or revised since the last synchronization must be uploaded to IMS by the employee. Examiners must complete an IMS case synchronization at least once every week that they have taken action on a case. Examiners are not required to synchronize a case if no action was taken on that case since the last synchronization. The examiner will also check-in and synchronize all case documents at the time the examiner closes the case. See Exhibit 4.25.5-2 , Required Uploads to IMS for IMS upload timeframes.

  2. A case file may require more or less documentation than the outlined IMS upload requirements. Deviations from the IMS upload requirements may be authorized by the group manager. A deviation from requirements must be:

    1. Approved by a group manager

    2. Communicated clearly to the examiner

    3. Documented in the case file

  3. In IMS, workpapers are issue specific and uploaded from the Case Tree or in the Issue Tree. Workpapers can be created in IMS or they can be uploaded from previously created files. Workpapers can also be added to either an open or closed case file from the team website. For additional workpaper upload and sorting instructions see the Issue Management System (IMS) Estate and Gift User Guide.

  4. The following documents should not be uploaded to IMS:

    • Blank forms, instructions, workpapers or lead sheets

    • IRS Publications and Notices

    • Copies of code sections, regulations, PLRs, cases, articles, etc.

    • Multiple copies of a workpaper or lead sheet

    • Copies of job aids and quality tips

IMS Synchronizations

  1. Synchronization is the process of transferring specific material to/from the examiner’s computer and the IMS Server. Once the synchronization is complete, any material synchronized on the examiner’s computer will be identical to the material on the IMS Server. There are five types of synchronizations performed in IMS: Summary, ERCS, Case, Reminder and Time.

  2. Summary − A Summary Synchronization downloads the case information for any case for which the user is a team member or manager.

  3. ERCS − An ERCS Synchronization will download return data assigned to the user in ERCS. IMS receives a download from ERCS nightly.

    1. ERCS changes made in IMS will not appear in ERCS. If information from ERCS is incorrect, the examiner should complete Form 5348, AIMS/ERCS Update, to change the data on ERCS. The ERCS record will be updated and downloaded through the ERCS synchronization.

    2. If the recorded TIN is incorrect in ERCS, the examiner must complete Form 5351, Examination Non-Examined Closings, to dispose of the wrong record on ERCS. Examiners can also establish a new record on ERCS with the correct TIN using Form 5345-D, Examination Request − ERCS (Examination Return Control System Users).

  4. Case Synchronization allows the examiner to ensure that all uploaded work is saved to the IMS Server in the event of computer failure. Case specific information such as Issues, Information Document Requests (IDRs), and Workpapers upload and download using the Case Synchronization process. Examiners must run an IMS case synchronization at least once every week that they have taken action on a case. Examiners are not required to run a case synchronize for a case if no action was taken on that case since the last synchronization. The examiner will also check-in and synchronize all case documents at the time the examiner closes the case.

  5. Reminder Synchronizations − The IMS Reminder menu is located on the IMS Toolbar. Users may view, edit, add, delete, activate, or deactivate reminders. Others cannot view an examiner's reminders. IMS also generates system reminders. The user should run a Reminder Synchronization to view the IMS generated reminders. These system reminders include:

    1. A reminder five days prior to the end of each ERCS monthly reporting cycle.

    2. A reminder for any case not having a new activity record (or modifying an existing activity record) or a case comment on a particular case for more than 25 days.

  6. Time Synchronizations − The IMS timekeeping system will track case time, miscellaneous direct examination time (MDET), and below-the-line (BTL) time. To input time on a return, the user must have created issues for the return. All direct examination time applied on IMS is by standard audit index number (SAIN) or uniform issue list (UIL) codes.

    1. The time needs to be on the IMS Server by Thursday at 8:00 pm EST.

    2. The user must synchronize their timesheet at least once a week (usually Thursday).

    Note:

    Time entered in IMS and not entered in ERCS will transfer. Corrected time does not transfer from IMS to ERCS after time for that period has been synched and transferred. The user must communicate any timesheet correction made to a time charge in IMS that has transferred to ERCS with their timekeeper.

Estate and Gift Tax Exam Process and Documentation (EPD)

  1. This section provides guidelines for the development of lead sheet and workpaper content and for workpaper and case file organization. These guidelines are provided to promote quality and consistency in the preparation and completion of lead sheets, workpapers, and case files.

  2. Estate and gift tax returns should be examined in a manner that will promote public confidence as stated in the Mission of the Service. See Policy Statement 1-1 located at IRM 1.2.10.1.1. The Estate and Gift EPD system is intended to assist the examiner in achieving this servicewide mission. EPD lead sheets and supporting workpapers constitute official government documents. They must be professional and objective in tone and language as well as free of unwarranted personal opinion and bias.

  3. Exam Process and Documentation (EPD) is a uniform system of planning, communication, risk analysis, and documentation. From the onset of the examination, the examiner must document and communicate the actions taken by using mandatory and non-mandatory workpapers and lead sheets. The EPD system is designed to facilitate consistent organization of case files and eliminate duplication. EPD lead sheets and workpapers serve four basic purposes:

    1. Provide a framework to plan the audit, including the analysis of internal documents, and to set the scope of the exam.

    2. Document the evidence gathered, audit steps and techniques applied, tests performed, and analyses conducted during the audit process.

    3. Support the factual and technical conclusions.

    4. Provide a basis for review by management and other stakeholders (e.g., Treasury Inspector General for Tax Administration (TIGTA) reviewers and Counsel). Well prepared workpapers facilitate review by numerous customers.

  4. EPD leads sheets and workpapers are the written records that support the audit findings. EPD lead sheets and workpapers must document the audit activities including audit steps and techniques applied, tests performed, information obtained, and conclusions reached. They must include all the information necessary to support the audit results. Completed EPD lead sheets and supporting workpapers must:

    • Reflect the evidence gathered, explanations, analyses and conclusions reached.

    • Effectively explain the issues addressed during the audit.

    • Provide the evidence to reflect the scope and depth of the audit.

    • Support the determination of the tax liability.

    • Reflect the audit process, allowing a subsequent reviewer to trace a transaction or event and related information from beginning to end.

      Note:

      If a lead sheet contains check boxes, they should be used to notate the applicability of an action taken. Supporting documentation to explain the action taken should be included. Generally, check boxes by themselves are not adequate supporting documentation.

  5. EPD lead sheets are located in the Estate and Gift Notebook Job Aid (Notebook) Forms Library, and are to be utilized for planning and prompting activities to comply both with administrative and procedural matters, as well as technical information. Issue specific lead sheets are to be utilized to assist the examiner in the steps needed to resolve issues. A Examination Process and Documentation Quick Reference Guide to Tools is located at Exhibit 4.25.5-1.

  6. Examiners must contemporaneously update the lead sheets and supporting workpapers during the audit. As issues are resolved, EPD lead sheets and workpapers should be finalized, printed and included in the case file or uploaded to IMS. See Exhibit 4.25.5-1 and Exhibit 4.25.5-2. Case file and IMS upload checklist job aids are available for reference through the Estate and Gift SharePoint.

Statute Verification Lead Sheet

  1. The purpose of the Statute Verification Lead Sheet is to verify the correct statute of limitations date. See IRM 4.25.1.1.3, Protection of Statute of Limitations.

  2. The examiner must verify the statute of limitations, complete the Statute Verification Lead Sheet and correct any statute inaccuracies on IDRS (e.g., ASED date) for all assigned cases.

  3. The Statute Verification Lead Sheet must be completed and uploaded to IMS within 45 calendar days from case receipt. See IRM 4.25.1.5.2, Efficient Resolution and National Standard Time-frames.

  4. The examiner may need to update the Statute Verification Lead Sheet throughout the examination in order to document changes to the statute date as a result of consents or to confirm required statute control procedures.

Activity Record, Form 9984

  1. The Form 9984, Examining Officer’s Activity Record, is used to document the hours charged to a case and to briefly record the examiner’s actions. The Examining Officer’s Activity Record is created in IMS from timesheet entries. See IRM 4.25.5.2.2, Time Sheet and Form 9984 Activity Record.

Estate Tax Examination EPD

  1. The Estate Tax Mandatory Lead Sheet replaced the essential elements of the Examination Planning and Work Paper Indexes, the Administrative Lead Sheet, the Other Tax Return Lead, and the Asset Probe Lead Sheet. The new combined lead sheet serves as an index and summary of supporting workpapers and provides the following benefits:

    • Identifies applicable dates, referrals, taxpayer related contacts, examination and penalty issues

    • Establishes a consistent format, making the case file easier to prepare and review

    • Streamlines the audit process by helping the examiner establish an effective pre-audit plan

    • Includes audit steps that assist the examiner through issues with which they are unfamiliar

    • Allows audit steps to be added, modified or eliminated through risk analysis

    • Addresses the administrative items requiring comment by the examiner (e.g., required filing checks, minimum income probes and related return research)

  2. The Estate Tax Mandatory Lead Sheet is required for estate tax case examinations, not designated as limited scope audits. However, all fields are not required in all examinations. The examiner will exercise judgment in determining which items are required based on the facts and circumstances of the specific case.

  3. The following examination techniques should be addressed in all estate tax examinations:

    1. Transcript review and related return research

    2. Identification of examination issues

    3. Completion of asset probe and minimum filing checks

    4. Penalty and fraud analysis when the audit results in a deficiency

    5. Documentation of the issuance of applicable taxpayer rights publications and notices

      Note:

      The Estate Tax Mandatory Lead Sheet addresses each of the required examination techniques. However, the examiner may need to expand the documentation of their actions and analysis using issue specific lead sheets, workpapers, correspondence and the activity record. Cross references should be provided when applicable.

Limited Scope Audit EPD

  1. The Limited Scope Audit Mandatory Lead Sheet replaced the essential elements of the LSA Examination Planning and Work Paper Indexes, the Administrative Lead Sheet, the Other Tax Return Lead, and the Asset Probe Lead Sheet. The new combined lead sheet serves as an index and summary of supporting workpapers and provides the following benefits:

    • Identifies applicable dates, referrals, taxpayer related contacts, examination and penalty issues

    • Establishes a consistent format, making the case file easier to prepare and review

    • Streamlines the audit process by helping the examiner establish an effective pre-audit plan

    • Includes audit steps that assist the examiner through issues with which they are unfamiliar

    • Allows audit steps to be added, modified or eliminated through risk analysis

    • Addresses the administrative items requiring comment by the examiner (e.g., required filing checks, minimum income probes and related return research)

  2. In addition to the Limited Scope Audit Mandatory Lead Sheet, the examiner must complete a Form 9984, Activity Record and a Statute Verification Lead Sheet.

  3. Limited Scope Audits will have specific examination issues designated by classification or the group manager. Unless permitted by the group manager, the examination issues will not be expanded beyond the classified/assigned issues.

Gift Tax Examination EPD

  1. The Gift Tax Mandatory Lead Sheet is required for gift tax case examinations, not designated as limited scope audits. However, all fields are not required in all examinations. The examiner will exercise judgment in determining which items are required based on the facts and circumstances of the specific case.

  2. The following examination techniques should be addressed in all gift tax examinations:

    1. Transcript review and related return research

    2. Identification of examination issues

    3. Completion of asset probe and minimum filing checks

    4. Penalty and fraud analysis when the audit results in a deficiency

    5. Documentation of the issuance of applicable taxpayer rights publications and notices

      Note:

      The Gift Tax Mandatory Lead Sheet addresses each of the required examination techniques. However, the examiner may need to expand the documentation of their actions and analysis using issue specific lead sheets, workpapers, correspondence and the activity record. Cross references should be provided when applicable.

  3. In examining a gift tax return, it is the responsibility of the examiner to determine if prior gift returns were filed, and to verify the amount of Deceased Spousal Unused Exclusion (DSUE) used, when appropriate. The examiner should use the Retrieving Historical Gift Tax Returns Job Aid and the, Retrieving Estate Tax Returns for Reference Job Aid, for complete procedures for securing historic estate and gift tax returns. The Job Aids can be found on the Estate and Gift SharePoint.

  4. The examiner must verify the statute of limitations for each gift tax return under examination and discuss the actions necessary to protect the statute of limitations with the group manager. The examiner should document the verification of the statute of limitations in the case Form 9984, Activity Record, and on the Statute Verification Lead Sheet. See IRM 4.25.5.3.1 , Statute Verification Lead Sheet. See IRM 4.25.5.1.1.1, Verify Statute Date , and IRM 25.6.23-3, Instructions for Updating the Statute on AIMS.

  5. Pub 1, Your Rights as a Taxpayer, and Notice 609, Privacy Act and Paperwork Reduction Act, must be provided to the taxpayer in all gift tax examination cases where the taxpayer is contacted.

  6. The examiner should document the case Form 9984, Activity Record, with all actions relating to taxpayer rights.

  7. Except for a limited scope examination, the examiner should probe for undisclosed transfers.

  8. The examiner must maintain significant examination activity every 45 days, and record their actions in the case Form 9984, Activity Record. See IRM 4.25.5.2.2, Time Sheet and Form 9984 Activity Record.

  9. Request internal specialists, outside fee appraisers, and paraprofessional support, when their participation enhances the quality, accuracy, and fairness of the examination. However, the examiner to whom the return was assigned, under the direction of the group manager, is responsible for making the recommendation of tax liability, ensuring conclusions are properly supported by the facts and law, and explaining adjustments to the taxpayer. See IRM 4.25.12, Valuation Assistance.

  10. Obtain omitted copies of documents and information required to be filed with the return. Original documents should not be marked.

  11. Information and copies of documents should not be obtained and made a part of the case file unless they are:

    1. Required to be filed with the return.

    2. Necessary to support adjustments.

    3. Necessary for a complete examination of the return.

    4. Needed for complete explanation of questioned items which resulted in a no-change.

Non-Mandatory Lead Sheets

  1. The following lead sheets are not mandatory for all examinations but are recommended as a best practice. These lead sheets are intended to increase efficiency, and reduce examination errors.

Manager Plan to Close Lead Sheet
  1. The Manager Plan to Close Lead Sheet should not be completed until the examination has been in process for 120 days. Even at that point in the audit cycle, a further exception exists for examinations that are substantially complete, and do not require further managerial involvement. The plan to close meeting between the examiner and manager provides for an opportunity to discuss the status of the examination, problems or difficulties obtaining requested items, and follow up actions to be taken.

  2. A Mutual Commitment Date should be discussed and documented during the Manager Plan to Close meeting. If a Mutual Commitment date cannot be established, the examiner should provide an Estimated Closing Date.

  3. The Manager Plan to Close meeting can be used independently or as part of a workload or Technical Time Report (4502) review.

Penalty Lead Sheet
  1. The applicability of penalties should be considered during every audit and, if warranted, developed as the audit progresses. Only after all facts and circumstances surrounding an audit have been developed can a determination be made as to the application of appropriate penalties. See IRM 20.1.5, Return Related Penalties.

    Note:

    The examiner must not document conclusions regarding a return preparer’s responsibility for errors and the assertion or non assertion of the return preparer penalty in the estate or gift tax case file. See IRM 4.25.7.2 for additional guidance.

  2. IRC 6751(a) requires that the Service provide the taxpayer with the name of the penalty, the Internal Revenue Code section under which the penalty is imposed, and a computation of the penalty on the notice (report) imposing the penalty.

  3. The Penalty Approval Lead Sheet should be used by the examiner to determine whether an assessment of penalties is warranted in all cases with an increase in tax. The Penalty Approval Lead Sheet requires that the examiner seek the group manager’s approval for the assessment of penalties.

  4. The assertion or non-assertion of penalties must be documented in the case file whenever an audit results in a deficiency. The extent of the documentation will depend on the nature of the adjustments and the amounts involved. Summary statements (e.g. negligence penalty applicable or negligence penalty deemed not applicable, are not sufficient. The examiner must cite the appropriate regulations, rulings or court decisions that are specific to the case’s facts and circumstances for assertion or non-assertion of penalties. Alternative penalty positions must be documented in the workpapers when applicable.

  5. The examiner may also use the Penalty Approval Lead Sheet to document the verification of previously assessed penalties.

  6. See IRM 20.1, Penalty Handbook, for more information regarding the assessment or abatement of penalties. See also IRM 4.25.7, Estate and Gift Tax Penalty and Fraud Procedures.

  7. IRC 6751(b) provides that prior to assessment, all cases recommending the assertion of certain penalties must have written managerial approval. The group manager must perform a meaningful review of the penalty determination. The examiner should document all formal and informal managerial involvement relating to any assessment or non-assessment of penalties in the Form 9984, Activity Record.

  8. The examiner should also briefly address the assertion or non-assertion of penalties in the penalty portion of the case specific mandatory lead sheet (e.g., Estate Tax Mandatory Lead Sheet).

  9. The examiner should review the accuracy of any previously addressed or abated penalties and document their findings in their workpapers

Reasonable Cause Lead Sheet
  1. The examiner should use the Reasonable Cause Lead Sheet to document a taxpayer or preparer’s reasonable cause defense to the assessment of penalties.

    Note:

    A reasonable cause defense is just one potential taxpayer defense to the assessment of penalties. See IRM 20.1.1, Introduction and Penalty Relief for an overview of other penalty relief procedures and taxpayer arguments.

  2. See IRM 20.1, Penalty Handbook and IRM 4.25.7, Estate and Gift Tax Penalty and Fraud Procedures, for reasonable cause analysis guidance.

Fraud Lead Sheet
  1. During every audit, examiners must be alert to fraud indicators and assert the civil fraud penalty when there is clear and convincing evidence to prove that some part of the adjustment increasing the tax was due to civil fraud. See IRM 25.1.2.3 , Indicators of Fraud. Such evidence must show the taxpayer's intent to evade tax, which the taxpayer believed to be due. For every case resulting in a deficiency, examiners must document their consideration of fraud, including applicable fraud indicators, even if the civil fraud penalty is not pursued or developed.

  2. The Fraud Development Lead Sheet should be used to assist the examiner in determining whether the assessment of fraud penalties is warranted. For more information regarding fraud see IRM 25.1, Fraud Handbook, and IRM 4.25.7.5, Estate and Gift Tax Penalty and Fraud Procedures, Fraud.

  3. Fraud considerations and factors should also be documented on the case specific mandatory lead sheet (e.g., Estate Tax Mandatory Lead Sheet).and conversations with the examiners group manager regarding fraud should be documented in the case Form 9984, Activity Record.

Risk Analysis
  1. Risk analysis techniques are intended to assist the examiner in making decisions that may take additional time and involve some risk of failure or uncertainty of outcome. The examiner’s risk analysis should be documented on the relevant issue specific lead sheet. Risk analysis should be used to focus the examiner’s efforts on the issues that make a difference in the audit, instead of on the ones that have little or no adjustment potential. Risk analysis helps the examiner allocate time, resources, and efforts to gain efficiency, quality determinations, and taxpayer satisfaction. The examiner should apply risk analysis techniques to:

    1. Expand the scope of the examination beyond the classification issues identified by classification and/or the group manager on assignment.

    2. Facilitate conversations with management regarding the decision to cease work on classified issue(s) or managerial selected issues.

    3. Assist other users of the file (cases that are reassigned, reviewed or sent forward to Appeals or Counsel) in understanding examination issue development decisions.

  2. The examiner should consider the following concepts when applying risk analysis techniques:

    • Materiality

    • Resources

    • Adjustment Potential

    • Overall Compliance Considerations

Other Non-Mandatory Lead Sheets
  1. Other lead sheets and work papers are available to the examiner in order to aid the examiner in obtaining information and making determinations. These include:

    • Estate Tax Attorney Plan to Close Check Sheet

    • Initial Taxpayer / Representative Contact Check Sheet

    • Initial Appointment / Meeting Agenda

    • Initial Interview Questions and Notes

    • Generic Lead Sheet (Estate or Gift)

    • Third Party Contact Procedures

    • Misc. Communication Workpapers and Enclosures

Issue Specific Lead Sheets and Technical Guidance

  1. This section explains the use of issue specific lead sheets and provides technical guidance for common estate and gift tax issues.

  2. The use of a lead sheet is required for all issues. However, the examiner may choose whether an issue-specific lead sheet, generic lead sheet or risk analysis technique best suits their needs. Regardless of which lead sheet is chosen, the examiner must use it to identify the issue and steps or actions taken to develop the facts, determine the applicable law, arguments made (including taxpayer arguments), and determine a conclusion for all classified or managerial selected issues. The examiner should document all managerial discussions to limit the examination issues in the relevant issue lead sheet, and in the case Form 9984, Activity Record.

  3. Issue lead sheets must reflect the issue name, adjustments (when applicable), conclusion, audit steps, facts, law, risk analysis, taxpayer's position, and conclusions reached. This information should be presented in a logical order so that the audit steps taken to support the conclusions can be easily determined. See IRM 4.10.9.6.2, Issue Lead Sheet, IRM 4.10.9.6.2.1, Issue Lead Sheet Format, and IRM 4.10.9.6.2.2, Issue Lead Sheet Content.

    Note:

    See IRM 4.10.9, Workpapers for formatting, content and organization requirements of administrative case file workpapers.

Adjusted Taxable Gift Lead Sheet
  1. Use the Adjusted Taxable Gifts Lead Sheet to document an examination of omitted gifts or gifts reported on a Form 709 or a Form 706.

  2. To secure historical gift tax returns which have not been associated with the Form 706 at the time of assignment, refer to IRM 4.25.5.1.2.1.

  3. If annual exclusions are claimed, determine if the donee received a present interest in the transferred property:

    1. The donee must have an unrestricted right to immediate use, possession, or enjoyment of the interests or income from the property transferred. See Hackl v. Comm'r, 335 F.3d 664 (7th Cir. 2003). See also, Price v. Comm'r, T.C. Memo 2010-2 (T.C. 2010) and Fisher v. United States, 2010 U.S. Dist. LEXIS 23380 (S.D. Ind. 2010).

Schedule A – Real Estate Lead Sheet
  1. The Schedule A, Real Estate Lead Sheet provides the examiner with a list of considerations when verifying ownership and valuation of real estate in a gross estate.

  2. Reminders include researching for any sales under Treas. Reg. 20.2031-1(b), verifying fractional interests, reviewing discounts, and determining if a referral should be made to engineering.

  3. The lead sheet also calculates any adjustments and provides space for documenting an examiner’s findings.

  4. When Special Use Valuation (IRC 2032A) is elected on Form 706, refer to the Schedule A-1 Lead Sheet explained at IRM 4.25.5.3.7.3.

  5. A real property appraisal may include a reduction of the fair market value of the subject property to account for a conservation easement. See IRM 4.25.5.3.7.31, Schedule U – Conservation Easement Lead Sheet.

  6. Is community property involved? Determine how and when property was acquired, (e.g. prior to marriage, by gift, by inheritance.) See IRM 4.25.5.3.7.7,Community Property.

  7. Internal valuation support is provided by LB&I Engineering. See IRM 4.25.12, Valuation Assistance, for engineering and outside fee appraisal referral procedures. Prior to making an engineering referral, the examiner should request any missing appraisals or relevant data, and review the appraisal to determine whether the appraisal:

    1. Applies a method appropriate for the subject matter being valued

    2. Includes reasonable assumptions and adjustments to comparable sales

    3. Was prepared by a qualified and independent appraiser

Schedule A-1 – Section 2032A Valuation Lead Sheet
  1. The Special Use Valuation Lead Sheet, should be used to document the examination of a Schedule A-1, 2032A, Special Use Valuation election.

    1. The examiner should review the return and attachments to ensure that a proper election was made. All portions of the Schedule A-1 should be complete, and the lien agreement should be attached with all necessary signatures (e.g., Trustees, Beneficiaries, Corporate Officers, etc.). The examiner should also verify that the liquidity requirements meet the 50 percent and 25 percent tests. See IRC 2032A(b).

    2. The examiner documents the examination process and analysis used to determine whether the estate had a qualified use and met the material participation tests before and after the date of death.

    3. Where the IRC 2032A(e)(7) farm valuation method was used, the examiner should review the estate’s appraisals for adequacy and completeness. The examiner should document their findings and consider making an engineering referral when necessary. See IRM 4.25.12.3, Referrals to Engineering Services.

  2. If a qualified use or material participation ceased after the date of death, the examiner should secure a Form 706A.

  3. The examiner should verify that Form 6111, Notice of Special Use Valuation Election (IRC 2032A), is properly completed. See IRM 4.25.11.1, IRC 2032A Special Use Valuation Election, and Form 6111 Notice of Special Use Valuation Election (IRC 2032A).

  4. To calculate the IRC 2032A recapture see IRM 4.25.6.4.6, 2032A Recapture Report Tool Worksheet , and the Estate and Gift Tax Notebook Job Aid User Manual.

Schedule B – Stocks and Bonds Lead Sheet
  1. The Schedule B, Stocks and Bonds Lead Sheet, focuses on the value of traded securities and various bonds, including Series EE, HH and I bonds.

  2. The lead sheet reminds the examiner to secure necessary data from the taxpayer if a request will be made to Estate and Gift Campus Operation (Campus) for additional valuation of securities.

    1. The number of shares, the CUSIP number and the valuation date need to be provided to the Campus when requesting stock valuations using electronic resources.

    2. Fax all requests to the Campus. See the Estate and Gift SharePoint for the current facsimile information.

  3. When stock in a closely held company is listed on Schedule B of Form 706, use the Closely Held Business Lead Sheet discussed at IRM 4.25.5.3.7.6.

Schedule C – Mortgages, Notes, and Cash Lead Sheet
  1. The Schedule C, Mortgages, Notes, and Cash Lead Sheet, focuses on verification of the outstanding balance of a mortgage or promissory note on the decedent’s date of death.

  2. The examiner is reminded to verify whether any discounts are appropriate.

  3. The interest rate of any items on this schedule should be verified and the inclusion of the same considered.

  4. An examiner should also check for Self-Canceling Installment Notes (SCINs), forgiveness of indebtedness, installments sales, and promissory note transactions that may not be arms-length, when warranted.

  5. An independent review of bank account balances may be necessary by requesting copies of the bank statements.

Closely Held Business Lead Sheet
  1. The Closely Held Business Lead Sheet is used to verify the fair market value of decedent’s interest in a closely held business.

  2. Determine if there have been any sales of the stock? If so, secure sales documentation.

  3. Does the governing entity instrument contain requirements for determining the sales price of the closely held business interest?

    1. Does the closely held business have practices for determining the sales price?

    2. Are there rights of first refusal that may result in a reduction in the fair market value?

  4. Review appraisal attached with all appropriate financial records for the five year period preceding the year of death including:

    1. U.S. Returns of Corporation Income (Forms 1120 or 1120S); Balance Sheets; and Statements of Income (consider Rev. Rul. 59-60 (I.R.S. 1959).

    2. Was the appraiser independent (preparer, personal representative, heir, estate’s attorney or accountant)? Are they a qualified appraiser?

  5. Verify and/or prepare a current Balance Sheet as of the date of death/alternate valuation date(s) restating the assets/liabilities to their fair market values on that date.

  6. Consider an engineering referral and/or outside fee appraisal request as appropriate. See IRM 4.25.12.5, Valuation Assistance, Outside Fee Appraisals.

  7. Determine decedent’s ownership of closely held business by reviewing historic stock ledgers, and consider transfers made to related parties.

  8. Request and review a copy of any buy/sell agreement(s) in effect at date of death. Do the buy-sell agreements meet the three-prong test of IRC 2703 (post-10/8/1990)?

  9. Consider whether the method of valuation is appropriate.

  10. Determine the correct nature and extent of discounts (e.g., discount for lack of marketability, discount for lack of control, etc.).

Community Property
  1. Community property is a form of co-ownership between spouses in which each spouse owns an undivided one-half interest in each item of community property acquired during marriage, regardless of how the property is titled. Community property is defined almost uniformly in all community property states as property acquired during marriage by either spouse or both spouses. Property acquired out of earnings or attributable to the personal effort of either spouse during marriage is presumed to be community property. Proceeds of, and the income from, community property are likewise treated as community property.

  2. There are nine "community property states" and one state has an "elective" community property system. Even estates of decedents who die in common law states may be affected by community property rules if the decedent previously lived in a community property state. The following states have maintained community property systems since the nineteenth century: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. Effective as of 1986, Wisconsin enacted its Marital Property Reform Act, adopting a community property system. Effective as of 1998, Alaska adopted the Alaska Community Property Act, providing for an elective community property system.

  3. Prior to the Revenue Act of 1948, several other states temporarily adopted community property laws. These were Hawaii, Michigan, Nebraska, Oklahoma, Oregon, and Pennsylvania. However, after enactment of the income-splitting provisions of the Revenue Act of 1948, all of these states (except Pennsylvania) repealed their community property statutes. After that, Pennsylvania’s community property statute was held unconstitutional.

  4. In all of the "temporary" community property states, except Pennsylvania, community property acquired during the effective periods of those statutes may have retained its community character even after the repeal of the particular statute, depending on each state’s requirements. Consequently, spouses who have lived their entire lives outside the traditional community property states may nevertheless own community property.

  5. Under community property both spouses have presently vested, equal, undivided interests in all community property and equal, or nearly equal, management power. Some actions affecting certain types of community property assets, such as real estate, require the consent of both spouses. In addition, most jurisdictions permit a spouse who is operating or managing a community property business to exercise sole management and control of the business.

  6. Under IRC 2033, a decedent’s gross estate includes the value of all property to the extent of the interest therein of the decedent at the time of his or her death. Neither the Code nor the regulations contain special provisions for inclusion of property characterized by the laws of community property jurisdictions. The application of IRC 2033 requires additional analysis as to whether the decedent’s property interests are subject to state community property law.

  7. IRC 2033 determinations made based on local property rules generally result in the inclusion of the value of all separate property owned by the decedent together with the value of one-half of the community property owned at death by the decedent and his or her surviving spouse.

  8. Where spouses transfer community property and each retains a life estate in the property, the transferred property is subject to normal treatment under IRC 2036; i.e., one-half of the value of the property is included in the gross estate of each spouse. When the transfer is made by both spouses, but possession or enjoyment or the right to income is given to only one of them, the transfer generally will attract estate tax liability only in the estate of the spouse who retained enjoyment, and only to the extent of the community half that said spouse has contributed.

  9. Proceeds of the sale of community property and income from community property are also community property. Income from separate property is treated differently among the jurisdictions. Courts in some states follow the Spanish doctrine that the “fruits” of separate property realized during marriage are community property. Other states require use of various apportionment formulae to distinguish income attributable to separate property from income attributable to the efforts of the spouse who owns the separate property (thus making it community property).

  10. Typically, separate property is statutorily defined as property acquired by a spouse while single, or by gift, bequest, devise, or descent.

  11. Most state laws permit one spouse to make a gift of his or her interest in a community asset to the other spouse, thereby converting the entire asset into the separate asset of the donee spouse. Also, spouses may agree that certain property is the separate property of one spouse and are generally free to convert community property into separate property.

  12. If separate and community aspects are so confused and commingled that they cannot be apportioned, then the entire mass is presumed to be community property. This is known as the doctrine of commingling. Problems may arise when community property is used to improve separate property, or to make payments on a separate obligation, and vice versa. Usually, if a spouse uses community property to improve his or her separate property, that spouse will hold title to the improvements, but is obligated to reimburse the community for the increase in value of the separate property resulting from the improvement. However, some courts have required an express agreement to that effect and, absent such agreement, have held there is no right of reimbursement. Some jurisdictions treat property that was acquired under an installment contract executed prior to the marriage and funded partly with community property as constituting part community and part separate in proportion to the amount of community and separate property used to make the payments. Under the laws of other jurisdictions, the property retains its character at the time of the contract as separate property, and the marital community has a right of reimbursement.

  13. Choice of law issues often arise when property is moved from one jurisdiction to another. The general rule is that the character of movable property is fixed at the time of acquisition in accordance with the law of the marital domicile at that time. Thus, if the parties are domiciled in a community property state, the status of movable property acquired during marriage is determined by the community property law of that state. The character of real property is generally determined by the law of the situs. However, if community funds are used to purchase real property in a common law property state, the common law jurisdiction will usually respect the interests of the spouses in that property, even though the exact community nature is not recognized by that jurisdiction. When spouses are domiciled in two different states, the character of property is in general to be determined by the law of the state in which the spouse who acquired the property was domiciled at the time of acquisition.

  14. The issue of whether a Federal statute preempts state community property laws is the subject of repeated litigation. For example:

    1. Government bonds: Several courts have held that state law may allow a spouse to recover one-half the value of a bond acquired with community property even though a spouse has designated a third party as beneficiary on death.

    2. Federal copyright laws: It has been held that Federal copyright laws do not preempt state community property laws.

    3. The Social Security Act has been held to preempt state community property laws.

    4. Federal criminal forfeiture statutes have been held to preempt California community property law such that the spouses of convicted drug traffickers are precluded from claiming a share of illegal drug moneys as community property under the California law.

    5. Qualified Plan benefits and IRAs: See Boggs v. Boggs, 520 U.S. 833(1997); Bunney v. Commissioner, 114TC. 259 (2000).

Schedule D – Life Insurance Lead Sheet
  1. The Schedule D, Insurance Lead Sheet provides guidance on verifying life insurance policies a decedent held an interest in on his/her date of death. An interest may include ownership, beneficiary, recent transfer, or payable to the decedent’s closely held corporation.

  2. Form 712, Life Insurance Statement, must be secured from the taxpayer in all situations where a decedent was the owner of a life insurance policy.

  3. The lead sheet also suggests requesting a copy of the policy and for excluded policies, the policy application, any attachments, riders or assignments, when applicable. Check for evidence of life insurance not includible in the gross estate and split-dollar life insurance issues.

Domicile Lead Sheet
  1. The Domicile Lead Sheet should be used to document the examiner’s analysis where the decedent’s domicile is called into question. See IRM 4.25.4.1.1, Domicile.

  2. The Domicile Lead Sheet provides audit steps and reminders by prompting the examiner to consider the following:

    1. Whether treaty language should be consulted?

    2. Does the decedent meet the classic domicile test standards?

    3. Do the facts and circumstances in the case indicate that the decedent held domicile in a foreign country?

  3. The examiner should ask the following questions and obtain documents and information to determine the decedent’s domicile:

    1. Where did the decedent actually reside?

    2. Did the decedent have the intent to remain there indefinitely?

    3. Where did the decedent own homes?

    4. How many days per year did the decedent spend in each home?

    5. In what countries did the decedent hold a passport, visa, work permits, resident permit, driver’s license etc.?

    6. Where did the decedent file income tax returns?

    7. Where and when did the decedent last vote?

    8. Where are most of the decedents business and property interests?

    9. Has the decedent made any non-self serving statement regarding his/her domicile?

Schedule E – Jointly Owned Property Lead Sheet
  1. The Schedule E, Jointly Owned Property Lead Sheet should be used to document the examiner’s analysis and determinations regarding the completeness, valuation, and accuracy of the estate’s reporting of qualified joint interests and all other joint interests.

  2. Qualified Joint Interests (i.e., interests held by decedent and his or her spouse as the only joint tenants pursuant to IRC 2040(b)(2)) should be reviewed to ensure the proper valuation of jointly held assets.

    1. If the value of the gross estate is less than the basic exclusion amount and the Form 706 is being filed solely to elect portability of the Deceased Spousal Unused Exclusion (DSUE) amount, the estate may not be required to report the value of the assets reported on Schedule E, Part 1. See Instructions, Form 706 and 26 CFR 20.2010-2T for more information.

  3. If the property was not held as a qualified joint interest, the examiner should also document their verification of the nature and extent of the decedent’s interest in the jointly owned property; the ownership documentation for the asset (e.g., deeds, etc.); obtain proof of contribution from the other joint tenant(s) (e.g., purchase price, mortgage and interest payments, etc.), and that the expenses associated with the property properly reflects the decedent’s portion.

Schedule F – Misc. Property Lead Sheet
  1. The Schedule F, Transfers during Decedent’s Life Lead Sheet provides audit steps and reminders for verifying the fair market value of miscellaneous property not reportable under any other schedule. Assets frequently reported on Schedule F may include:

    1. Interests in family limited liability entities (See IRM 4.25.5.3.7.12)

    2. Shares of closely held corporations (See IRM 4.25.5.3.7.6)

    3. Personal property (e.g., jewelry, antiques, cars, club memberships, collectibles, etc.) (See IRM 4.25.12, Valuation Assistance)

    4. Objects of Art (See IRM 4.25.12, Valuation Assistance)

  2. The Schedule F Lead Sheet provides the following recommendations for reviewing the value of various assets:

    1. Determine value of miscellaneous property (e.g. crops, household goods, personal property, automobiles, boats, planes, accruals such as refunds, returns etc., farm or other large equipment, livestock, jewelry, etc.)

    2. Check the “blue books” or other resale markets

    3. Secure and inspect homeowner’s policy of insurance with attendant riders

    4. Review personal property tax assessment data (automobiles, boats, airplanes).

    5. Secure and review jewelry and gemstones appraisals as applicable.

    6. Secure and review appraisals of antiques, objects of art and collections. Refer the asset to Art Appraisal Services, as appropriate. See IRM 4.25.12, Valuation Assistance.

    7. Check Form 1041s for post-death income and determine if there are accrued (final) salary, commissions, or rents; claims (including refunds of income taxes), rights, royalties, judgments, or leasehold interests.

    8. Determine if there is any life insurance owned on the life of another (key man policy) and determine if includable.

    9. Interest(s) in partnership(s) or closely held businesses.

    10. General Powers of Appointment exercisable alone or in conjunction with another person are includible. Secure and review governing instrument granting the power. Secure itemization of assets subject to power.

Family Limited Liability Entities
  1. This section provides guidance on common issues arising during the examination of family limited liability entity assets and transfers.

  2. The Family Limited Liability (FLP/LLC) Lead Sheet should be used to document the examiner’s actions and findings as they related to the examination of family limited liability entities. The Family Limited Liability (FLP/LLC) Lead Sheet also provides sample audit tools and steps useful in examining family limited liability issue.

  3. Estate and Gift Policy staff maintains a current list of family limited liability entity related case rulings. See MySBSE Estate and Gift website for current family limited partnership technical guidance contact information.

  4. The examiner and group manager should consider whether or not the legal issues present in the case warrant Area Counsel guidance, and/or whether there are valuation issues that would require an SRS engineering referral as early in the family limited liability entity examination as possible. These considerations should be documented in the examiner’s case file and Form 9984, Activity Record.

  5. When examining a family limited liability entity the examiner should conduct a multi-pronged analysis. The examiner should first determine if the entity was validly formed and funded under the relevant state law by reviewing transfer documents (e.g., grant deed, assignments, etc.) to determine whether the assets were legally and timely transferred to the entity.

  6. The examiner may consider whether the formation and funding of the partnership resulted in an indirect gift, or may be subject to the step transaction doctrine. See, Shepherd v. Comm'r, 283 F.3d 1258 (11th Cir. 2002), and Senda v. Comm'r, 433 F.3d 1044 (8th Cir. 2006).

  7. The examiner should conduct interviews and review documents in order to determine whether the decedent’s transfer of family limited liability entity interests falls under an exception to IRC 2036, IRC 2037, IRC 2038 or IRC 2703, or determine whether the decedent’s reported family limited liability entity interest is includible under IRC 2036, 2037, or 2038.

    1. Consider whether the partners received family limited liability entity interests that were proportionate to the value of the property transferred. See Estate of Bongard v. Comm'r, 124 T.C. 95 (T.C. 2005).

    2. The examiner should review the facts of the case to establish whether an implied agreement existed (i.e., right to income) under IRC 2036(a)(1).

    3. Was there a failure to transfer legal title to property and decedent retained the income from the property? Consider including the property in the gross estate under IRC 2031, IRC 2033 and IRC 2036. See Estate of Harper v. Comm'r, T.C. Memo 2002-121 (T.C. 2002); Estate of Rosen v. Comm'r, T.C. Memo 2006-115 (T.C. 2006); Estate of Erickson v. Comm'r, T.C. Memo 2007-107 (T.C. 2007), and Estate of Gore v. Comm'r, T.C. Memo 2007-169 (T.C. 2007).

    4. Consider whether the partnership agreement contains provisions with restrictions that cannot meet the bona fide business arrangement and adequate consideration requirements of IRC 2703(b). See Holman v. Comm'r, 130 T.C. 170 (T.C. 2008). See also, Holman v. Comm'r, 601 F.3d 763 (8th Cir. 2010); Estate of Blount v. Comm'r, 428 F.3d 1338 (11th Cir. 2005), and True v. Comm'r(In re Estate of H. A. True), 390 F.3d 1210 (10th Cir. 2004).

  8. There are additional family limited liability entity examination tips and tools located in FLP folder located on the Estate and Gift SharePoint.

  9. See IRM 4.25.11.3, Special Examination Procedures, Family Limited Partnerships, for special procedural requirements (e.g., use of project codes, referrals to income tax, etc.) pertaining to cases with family limited liability entity examination issues.

Schedule G – Transfers during Decedent’s Life Lead Sheet
  1. The Schedule G, Transfers during Decedent’s Life Lead Sheet provides guidance on verifying the value of assets transferred during the decedent’s life.

  2. Secure and inspect all previously filed Gift Tax Returns (Forms 709). Properly consider and verify gift tax paid or payable by the decedent or the estate for gifts made within three years before death.

  3. Determine if the gift tax return reflects interests includible under IRC 2036 (retained life estate); IRC 2037 (transfers taking effect at death); IRC 2038 (revocable interests); IRC 2041 (power of appointment) or IRC 2042 (proceeds of insurance and insurance on the life of decedent receivable by other beneficiaries where decedent possessed incident of ownership including reversionary interest).

  4. It is recommended that examiner secure and inspect all governing instruments (e.g., trust documents), and review applicable trust accounts for a period of three years prior to the decedent’s death and inspect for beneficial (includible) transfers.

  5. If includible transfers were “split” with consenting surviving spouse and gift tax returns were filed, consider whether the full amount of the transfer would be includible to the extent of the rules pertaining to contribution under IRC 2040.

Generation Skipping Transfer Tax Lead Sheet
  1. The Schedule R – Generation Skipping Transfer Tax Lead Sheet should be used by the examiner to document the audit tools, steps, facts, law and analysis used to examine generation skipping transfer tax issues during the examination of a Form 706 or a Form 709.

  2. Determine whether the donee or the estate beneficiary is a skip person.

    1. Request date of birth information and/or a family tree to determine whether beneficiaries of the estate or donees of reported gifts are direct skip persons/indirect skip persons. See IRC 2613(a), Treas. Reg. 26.2612-1(d).

    2. If a lineal descendant of the transferor’s parent (or parent of a spouse) is predeceased on the date of transfer, the descendants will “move up” a generation. See Treas. Reg.26.2651-1(a).

  3. Review trust instruments and beneficiary designations to determine whether a trust is defined as a skip person trust. Trusts (or trust-like structures) are defined as skip persons if either all the beneficiaries who have a present interest in the trust are classified as skip persons, or if the trust may never make a distribution to a non-skip person. See IRC 2631(a)(2) and Treas. Reg. 26.2612-1(d)(2).

  4. Each Grantor has an exemption amount which can reduce or eliminate the generation skipping consequences of a transfer. Any available exemption is automatically applied to inter vivos direct skips absent action by the transferor, and there are special rules that can allow similar treatment for some transfers that are not direct skips. See IRC 2632(c).

    1. Review prior gift tax return filings to determine whether the donor and/or decedent formally allocated any GSTT exemption, or made a late allocation. If a donor failed to file a Schedule R reporting transfers to skip persons, the transfers may be subject to the deemed allocation rules set forth in IRC 2632(b). See also, Treas. Reg. 26.2632, and IRC 2642.

      Note:

      The donor may have also opted out of the automatic allocation rules if the transfer was made to an indirect skip, pursuant to IRC 2632(b)(3). See also, Treas. Reg. 26.2632-1(b)(2)(ii).

  5. For testamentary transfers, the executor can allocate the exemption among all transfers made by the decedent; if no allocation is made, the exemption is automatically allocated first to direct skips and then among all transfers that may later result in a taxable termination or taxable distribution. See IRC 2631(c)(1).

  6. IRC 2503(b) gift tax annual exclusions apply to direct skip inter vivos GST transfer when there is no trust involved; the exclusions, however, are called the “non-taxable portion” in context of the GSTT. If a transfer is made “in trust,” no annual exclusions are allowed for GSTT purposes (even though allowed for gift tax purposes) unless the income beneficiary is the only one who can receive principal and income during life, and the property will be included in the income beneficiary’s estate if he dies before termination.

  7. If the decedent reports an interest in a QTIP on Schedule G. Consider reviewing the first to die’s estate tax return to determine whether a reverse QTIP election was made. The reverse QTIP election is made by listing the QTIP trust on line 9, Part 1, Schedule R of the Form 706 filed for the original decedent; in earlier years the Form 706, Schedule R featured a check the box option for the election. The result of a reverse QTIP election is that the original decedent is treated as the grantor of the QTIP trust for generation skipping transfer tax purposes even though the trust is subject to estate tax when the surviving spouse dies. See Treas. Reg. 26.2652-2.

  8. Obtain and review any disclaimer instruments to determine whether a disclaimer was timely and accurately filed. See Treas. Reg. 25.2518-2(e). Disclaimed property may completely eliminate the assessment of generation skipping transfer tax. A minor has until age 21 years, nine months to disclaim property. See IRC 2518.

  9. It is recommended that the examiner use the Estate and Gift Notebook Job Aid (Notebook) to make exemption allocations and calculate generation skipping transfer tax in both gift and estate tax filing scenarios. To manually compute the generation skipping transfer tax:

    • Compute an applicable fraction by dividing the amount of the exemption that is applied to the transfer by the taxable amount

    • Compute an inclusion ratio by subtracting the applicable fraction from one

    • Compute the applicable rate by multiplying the inclusion ratio by the highest marginal estate tax rate

    • Compute the generation skipping transfer tax by multiplying the taxable amount by the applicable rate

Schedule H – Powers of Appointment Lead Sheet
  1. The examiner should use the Schedule H, Powers of Appointment Lead Sheet to document their inspection of the Form 706 and related testamentary instruments to determine the extent and value of any includible powers of appointment held or exercised by the decedent.

  2. If necessary, the examiner should perfect the Form 706 by securing the instrument creating the power and/or the instrument by which the power was exercised or released.

  3. A review of the decedent’s income tax returns may clarify whether income was reported from property subject to a power that may be includible in the gross estate.

  4. The examiner may make a fraud referral and consider the application of penalties if the Form 706 does not properly disclose and include property subject to a general power of appointment. See IRM 4.25.7, Estate and Gift Tax Penalty and Fraud Procedures.

Schedule I – Annuities Lead Sheet
  1. The Schedule I, Annuities Lead Sheet should be used to document whether the decedent owned an annuity or a retirement benefit (e.g., IRA, 401(k), etc.) payable to a beneficiary at his or her death, and the valuation of the annuity.

  2. Inspect the decedent’s designated beneficiary form(s), Form(s) 1040, and Form(s) 1041 to verify the existence of an annuity/retirement benefit and any payments/distributions.

  3. Inspect elections made on the Form 706, Schedule M, Line 3 to determine if the value of the annuity/retirement account is includible in the gross estate and fully deductible as a marital deduction.

  4. Verify the extent of decedent’s ownership interest and the valuation method used to determine the value of the annuity.

    1. A commercial policy should be valued at the replacement value based on the benefits received. Other annuities are valued using the applicable IRC 7520 interest rate.

  5. Examine substantiations of contributions made by the surviving beneficiary, or for other excluded approved retirement benefits, and verify the calculation of the includible amount.

Schedule J - Expenses Incurred During Administration
  1. The Schedule J, Miscellaneous Expenses Lead Sheet should be used to verify funeral expenses and miscellaneous expenses included in the administration or property subject to claims.

  2. Consider whether the expenses are necessarily and reasonably incurred by the estate for the collection of assets, payment of debts, or the distribution of property to the persons entitled to it, and are allowable in accordance with local practice. Verify that expenses were not incurred for the personal benefit of a beneficiary instead of for the estate.

  3. Verify that expenses will not also be deducted on the estate income tax return (Form 1041).

  4. Beginning in 2012, Form 706, Schedule J, includes an instruction to the estate to use Schedule PC to make a protective claim for refund due to a claim not currently deductible. For such a claim, the estate is instructed to report the expense on the relevant schedule but without a value in the last column. See IRM 4.25.9.3, Protective Claims for Refund.

Schedule J - Executor’s Commissions and Attorney Fees Lead Sheet
  1. The Schedule J Executor’s Commissions and Attorney Fees Lead Sheet should be used to document examination steps and analysis of Schedule J and Schedule L personal representative commission deductions and attorney fee deductions.

  2. Verify the amount of commissions or fees paid to the personal representative or the executor. As appropriate, solicit an executed Form 4421, Declarations – Executor’s Commissions and Attorney’s Fees, from non-professional representatives, if the amount paid is in excess of $10,000 and other adequate substantiation is not in the file.

  3. Determine whether the personal representative was entitled to the computed fees considering the governing instrument, local practice, local law, and statutory rates.

  4. Verify fees were not deducted on the estate income tax return (Form 1041).

  5. If the amount paid to a non-professional representative is in excess of $10,000 prepare Form 5346, Examination Information Report: See IRM 4.25.10.3.4, Case Closing Procedures In General, Prepare Form 5346.

  6. If the attorney fees claimed were estimated, the examiner should determine the accurate final fees:

    1. A Form 4421, Declaration – Executor’s Commissions and Attorney’s Fees may be solicited to substantiate the final fees charged.

    2. A ledger of billable hours or fees charged to date and a reasonable estimate of time and fees to conclude the estate’s administration may substantiate final fees charged.

    3. Additional fees claimed during the examination should be substantiated and verification of approval obtained, as appropriate. Estimated fees to close the estate may be allowed at the discretion of the examiner taking into consideration the relevant facts and circumstances.

  7. Determine whether the computed fees were appropriate considering local practice, local law, and statutory rates.

  8. Verify fees were not deducted on the estate income tax return (Form 1041).

Schedule K — Debts of the Decedent Lead Sheet
  1. The Schedule K, Debts of the Decedent Lead Sheet should be used to verify the amount of identified debts of the decedent.

  2. Obtain evidence of indebtedness: bills, invoices, underlying contract, lease, judgment, etc.

  3. Verify payment or that payment will be made.

  4. Verify validity of the debt under local law. Is the debt barred by the statute of limitations or doctrine of laches?

  5. Scrutinize debts presented by relatives. Are charges for services substantiated and reasonable? Are they presumed to be gratuitous under state law? Are notes enforceable? Did decedent receive adequate consideration for the note due?

  6. Verify property taxes are a personal obligation of the decedent at date of death. Is it a lien against decedent’s property? Was the property sold resulting in the purchaser paying part of the tax claim? See Treas. Reg. 20.2053-6(b)

  7. Calculate any income tax liabilities pro-rata between decedent and a surviving spouse with income.

  8. Review decedent’s final income tax return. Medical expenses of decedent paid within a year of death may be deducted either on the estate tax return or final income tax return, not both. Treas. Reg. 1.213-1(d)(2).

  9. Consider post-death events in cases of disputed or contingent debts, when computing the deduction. McMorris v. Comm’r, TC Memo 1999-82; Estate of Smith v. Commissioner, 198 F.3d 515 (5th Cir. 1999).

  10. Determine that claims for alimony or support payments meet the requirements of IRC 2516 (three year rule). See IRC 2043(b)(2).

  11. Beginning in 2012, Form 706, Schedule K includes an instruction to the estate to use Schedule PC to make a protective claim for refund due to a claim not currently deductible. For such a claim, the estate is instructed to report the expense on the relevant schedule but without a value in the last column. See IRM 4.25.9.3, Protective Claims for Refund.

Schedule K – Mortgages and Liens
  1. The Schedule K, Mortgages and Liens Lead Sheet should be used to verify where there are classified, large, unusual or questionable deductions claimed that require the verification of claimed mortgages and liens. To verify these deductions the examiner should:

    1. Obtain evidence of indebtedness: mortgage statement, note.

    2. Scrutinize mortgages or notes owed to relatives. Was the mortgage or note recorded? Did decedent receive adequate consideration for the mortgage or note?

    3. Verify the asset securing the mortgage is included in decedent’s estate. If only a portion of the asset is includible in the estate (co-ownership), only that portion of the mortgage is deductible. See 2053(a)(4) and Treas. Reg. 20.2053-7.

    4. Verify validity of the debt under local law. Is the claim barred by the statute of limitations or doctrine of laches?

    5. Verify that only interest accrued to the date of death is deducted even if the alternate valuation method is elected. See Treas. Reg. 20.2053-4.

Schedule L – Net Losses during Administration
  1. The Schedule L, Net Losses During Administration should be used to verify losses incurred due to casualty or theft. If losses are claimed the examiner should:

    1. Determine that the loss is incurred from a casualty or theft (e.g., fire, storm, hurricane, volcano, etc).

    2. Examine applicable insurance policy coverage and verify whether the loss has been reduced by any insurance proceeds received.

    3. Verify that the asset was held by the estate and not distributed to the beneficiary when the loss occurred.

    4. Alternate Valuation Election. Verify that the claimed loss deduction is not duplicated as a reduction to the value of the item included in the gross estate at the alternate valuation date.

    5. Verify that the losses have not also been deducted on the estate income tax return.

    6. Inspect bills, invoices, cancelled checks or other documents establishing proof of payment for Large, Unusual or Questionable (LUQ) expenses.

Schedule L – Property Not Subject to Claims Lead Sheet
  1. The Schedule L, Property Not Subject to Claims Lead Sheet should be used to verify expenses claimed for the administration of trust assets. To verify the deductions claimed on Schedule L the examiner should:

    1. Verify expenses are limited to those necessitated by decedent’s death, (i.e., trust termination expenses, non-recurring trust administration expenses). See Treas. Reg. 20.2053-8 for deductible vs. nondeductible expenses.

    2. Verify that the payment of the expense claimed was before the statute of limitations expired.

    3. Verify that the expenses have not also been deducted on the estate income tax return (Form 1041).

    4. Inspect bills, invoices, cancelled checks, or other documents establishing proof of payment for Large, Unusual or Questionable (LUQ) expenses.

    5. Beginning in 2012, Form 706, Schedule L includes an instruction to the estate to use Schedule PC to make a protective claim for refund due to a claim not currently deductible. For such a claim, the estate is instructed to report the expense on the relevant schedule but without a value in the last column. See IRM 4.25.9.3, Protective Claims for Refund.

Schedule M – Marital Deduction Lead Sheet, Non-QTIP Bequests to Surviving Spouse
  1. The Schedule M, Marital Deduction Lead Sheet, Non-QTIP Bequests to Surviving Spouse should be used to examine the validity of marital deductions claimed for outright bequests of property to the surviving spouse not subject to the qualified terminal interest property rules. See IRM 21.7.5.3.4, Defense of Marriage Act (DOMA), Revenue Ruling 2013–17.

  2. Verify that the surviving spouse was legally married, a US Citizen (note exception for QDOT IRC 2056A), actually survived, and is receiving assets from the decedent’s gross estate under a valid Will, Trust, Intestacy, Spousal Election, and/or beneficiary designation.

  3. Assure that the deductions on Schedules J, K (mortgage), and L reduce any marital deduction claimed for an asset to which these deductions apply.

  4. Verify disclaimed property deducted as passing to a surviving spouse actually does so under state law rather than to the heirs of the disclaiming party.

  5. If the decedent’s testamentary instrument provides for a pecuniary marital deduction formula bequest that can be satisfied by distributing estate assets, verify that the marital deduction qualifies pursuant to Rev. Proc. 64-19, 1964-1 C.B. 682. The Estate and Gift Tax Notebook Job Aid (Notebook) may be used to verify pecuniary marital deduction formulas and interrelated marital computations.

  6. Beginning in 2012, if the value of the gross estate, together with the amount of adjusted taxable gifts, is less than the basic exclusion amount and the Form 706 is being filed solely to elect portability of the Deceased Spousal Unused Exclusion (DSUE) amount, the estate may not be required to report the value of assets eligible for the marital or charitable deduction reported on Schedule M. If the estate is not required to report the value of the asset on the Form 706, Schedule M will identify the property but will not provide a value in the amount. See IRM 4.25.5.3.7.28, Portability.

Schedule M – (QTIP) Bequests to Surviving Spouse
  1. The Schedule M, QTIP Bequests to Surviving Spouse Lead Sheet should be used to examine qualified terminal interest property transfers to the surviving spouse.

  2. Verify that the surviving spouse was legally married, US Citizen (note exception for QDOT IRC 2056A) actually survived, and is receiving assets under a valid Will, Trust, Intestacy, Spousal Election, and/or beneficiary designation.

  3. Verify that the asset for which a marital deduction is claimed is also included in the decedent’s gross estate.

  4. Assure that the deductions on Schedules J, K (mortgage), and L reduce any marital deduction claimed for an asset to which these deductions apply.

  5. Verify that the marital deduction asset is not a terminable interest.

  6. Determine that a deduction for an elected QTIP property interest qualifies. Income must only be payable to surviving spouse; no remarriage conditions, etc.

  7. Verify that the residuary passing to the surviving spouse is calculated to reflect payment of expenses, taxes, claimed income tax deductions according to the terms of the Will, statutory intestacy and tax apportionment. (Interrelated computation may apply).

  8. Verify disclaimed property deducted as passing to a surviving spouse actually does so under state law rather than to the heirs of the disclaiming party.

  9. If a will or trust provides for a pecuniary marital deduction formula bequest that can be satisfied by distributing estate assets, verify that the marital deduction qualifies pursuant to Revenue Procedure 64-19, 1964-1 C.B. 682.

Qualified Domestic Trust Lead Sheet
  1. The Qualified Domestic Trust (QDOT) Lead Sheet should be used to document the examiner’s analysis of a QDOT issue.

  2. See IRM 4.25.4.2, International Estate and Gift Tax Examinations, Property Passing to Non-U.S. Citizen Surviving Spouse, Qualified Domestic Trust, Form 706-QDT for additional information regarding QDOT filing requirements, elections, changes in the surviving spouse’s citizenship status, and the required reporting requirements.

Schedule O – Charitable, Public, and Similar Gifts and Bequests
  1. The examiner should verify whether a charitable deduction represents a transfer to a qualified beneficiary, i.e., charitable, public, or religious purpose.

    Estates for Estate Tax Gift Tax Estates and Trusts for Income Tax
    Code Section IRC 2055 IRC 2522 IRC 642
    Form Number Form 706 Form 709 Form 1041
    Limitations No Limitations No Limitations No Limitations
    Permissible Recipients Not limited to U.S. Charities; Percentage deductions are allowed for Unitrusts, Annuity Trusts and Pooled Income Funds Not limited to U.S. Charities. Deductions are allowed for retained interests. Not limited to U.S. Charities; Percentage deductions are allowed for Unitrusts, Annuity Trusts and Pooled Income Funds
    Permissible Property May be any type of property included in the gross estate May be any type of property Must normally be an item of gross income from the current year’s receipts.
    Reason for Contribution Distribution must be pursuant to the Will, Trust or other non-probate beneficiary designated. Transfer effective at death such as life insurance, IRA, etc. No donative intent required. Distribution must be a completed gift Distribution must be pursuant to the Will, Trust or other non-probate beneficiary designated. Transfer effective at death such as life insurance, IRA, etc.
    Required Time of Payment Must be paid Must be a completed transfer. Special rules may apply. See IRC 2522(e) Must be paid (trusts and estates) or permanently set aside (estates and old trusts) during the year. A special election for trusts allows a deduction if payment is made in the subsequent year.
  2. To determine if an organization is tax exempt, check:

    • Pub 78, Cumulative List of Organizations

    • Appropriate records of exempt organization rulings maintained by the National Office

    • A copy of the Tax Exemption Letter

    • Online version of Publication 78

  3. Include a copy of the documentation of exempt status in the file and note exemption on Form 9984 and appropriate lead sheet.

    Note:

    A bequest to an organization that is exempt for income tax purposes may not qualify for an estate or gift tax charitable deduction.

  4. The amount passing to charity must be ascertained after analyzing the testamentary document and considering payment of debts, taxes, and expenses.

Schedule P – Credit for Foreign Death Taxes
  1. The estate may report a credit for foreign death tax credits on Schedule P of the Form 706. The examiner should use the Schedule P Lead Sheet to examine the foreign death tax credit.

  2. IRM 4.25.4.4, Foreign Death Tax Credit, provides guidance regarding the relevant authority for a foreign death tax credit, how the estate may claim the foreign death tax credit, and limitations to the foreign death tax credit.

Portability
  1. On December 17, 2010, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA) was signed into law. TRUIRJCA introduced the concept of "portability" of the federal estate tax exemption between married couples for the 2011 and 2012 tax years. On January 2, 2013 the American Taxpayer Relief Act (ATRA) was signed into law. Under ATRA, portability of the estate tax exemption between married couples was made permanent. A deceased spousal unused exclusion (DSUE) amount may be taken into account by a surviving spouse in determining the surviving spouse’s applicable exclusion amount only if the executor of the deceased spouse timely files a Form 706 for the deceased spouse’s estate, on which the executor computes the deceased spousal unused exclusion amount and makes a portability election. This section provides technical guidance for the examination of the DSUE at issue in either an estate tax or a gift tax examination. There are three Portability Lead Sheets for use in DSUE examinations:

    1. Form 706 Election to Port DSUE to Surviving Spouse

    2. Form 706 Using DSUE from Deceased Spouse

    3. Portability Lead Sheet – Form 709

  2. Use the Portability Lead Sheet – Form 706 Election to Port DSUE to Surviving Spouse if the assigned Form 706 claims to port DSUE to the Surviving Spouse. See Treas. Reg. 20.2010-1T(d)(5) and 1T(d)-3T. Some of the recommended examination steps include:

    1. Identifying and/or secure the workpapers used by the estate to calculate the DSUE amount.

    2. Obtaining DSUE-related returns, as needed, to confirm the DSUE election(s).

    3. Examine other classified issues and then consider the effect of any adjustments made to the corresponding DSUE-related items reported on Page 1, Line 9b and Line 7 of the Assigned Form 706.

  3. Use the Portability Lead sheet – Form 706 Using DSUE from Deceased Spouse(s) if the assigned Form 706 claims the use of DSUE from the last deceased spouse. See Treas. Reg. 20.2010-1T(d)(5) and 1T(d)-3T.

  4. Use the Portability Lead Sheet – Form 709, when the decedent or donor uses ported DSUE to make adjusted taxable gifts. As part of the Form 706 portability examination the examiner should consider the following:

    1. Inspect and verify Part 1, line 19.

    2. Identify and/or secure workpapers used by this Donor to calculate the DSUE amount.

    3. Obtain and inspect related DSUE returns as needed.

    4. Examine the classified issues.

    5. Make applicable adjustments to DSUE on this return based on review of the other DSUE-related returns, if any. The examination report should include any changes to DSUE (that arose from review of the DSUE-related returns).

    6. Make other adjustments, as necessary. The examination report should include any final balance of DSUE, if applicable.

      Note:

      An estate may elect to both use DSUE from a prior deceased spouse and port DSUE to a surviving spouse. The decedent may also have used DSUE during his or her life to make adjusted taxable gifts. Each portability issue lead sheet provides guidance for the examination of the porting or use of DSUE on a Form 706 or Form 709.

  5. The examiner should inspect and verify the portability election in all cases. See Treas. Reg. 20.2010-2T.

    1. If the portability election is invalid the examiner should zero-out the amount ported. If there are no other changes, the case should be closed as a No Change with Adjustments. See IRM 4.25.10, Case Closure Procedures. The examiner should issue a copy of the No Change with Adjustments report to the Taxpayer with a full explanation of the changed items. A Form 706 No Change with Adjustments case does not require a signed waiver, or the issuance of a Pub 3498.

    2. If the portability election is valid, the examiner should verify the computation of the Deceased Spousal Unused Exclusion (DSUE) amount available to port to the surviving spouse after considering all other applicable changes to the return. See Treas. Reg. 20.2010-2T(c). See examples at Treas. Reg. 20.2010-2T(c)(5).

    Note:

    The Treas. Reg. 20.2010 portability regs were issued on June 12, 2015 and published on June 16, 2015. For estate of decedents dying before June 16, examiners must rely upon the Temporary regulations. For years on or after June 16, the final regs apply.

  6. To close a Form 706 or Form 709 with an election to port DSUE or use ported DSUE the examiner should review the following table:

    IF ... THEN ...
    The assigned Form 706 uses no DSUE from prior spouse(s) Examine and close per normal procedures. See IRM 4.25.10.
    There are adjustments to a DSUE-related return where the IRC 6501 statute is open for that return Use normal closing procedures for the type of closure. See IRM 4.25.10.
    There are adjustments to DSUE-related return where the IRC 6501 statue is no longer open for that return A DSUE-reviewed return can only be closed either as:
    •No Change No Adjustments (no adjustment to DSUE ), or
    •No Change with Adjustment (any changes to DSUE, including zeroing out)
    Closing a Form 706 that has used DSUE from Deceased Spouse Close the assigned Form 706 using normal procedures. See IRM 4.25.10.
    In the process of examining an assigned Form 709, the examiner also opens a previously-filed Form 709 to review the DSUE, and that DSUE-reviewed Form 709 is closed as a no change/no change •No Change/No Change is a no change to the value of the returned gift and no change to DSUE.
    •Form 709 No Change/No Change requires no waiver.
    •No Appeals rights (do not issue Pub. 3498).
    •Close as No Change No Adjustments. See IRM 4.25.10.
    In the process of examining an assigned Form 709, the examiner also opens a previously filed Form 709 to review the DSUE, and that DSUE reviewed Form 709 is closed as a change/no change •If the Change/No Change (C/NC) arises from a change to "the value of any gift shown on the return" , and the IRC 6501 statute is open, the SS-Donor gets IRC 7477 rights.
    •If the C/NC arises solely from a change to DSUE (e.g., from a change to a prior DSUE-electing or DSUE-using return), TP does not get IRC 7477 rights, but Appeals may still be available if the IRC 6501 statute is open. See IRM 8.1.1.3.2.
    •Close such C/NC per IRM 4.25.10, generally, but note IRM 4.25.10.2.3 (3).
    •As with any C/NC, the report must be issued to TP with full explanation of changed items.
    If any DSUE-related return (Form 706 or Form 709) is examined to review the original DSUE election to port and/or the amount of the DSUE available, and that return is now taxable, and the IRC 6501 status is open Close the return as a normal case closure. See IRM 4.25.10.
    If any DSUE-related return (Form 706 or Form 709) is examined to review the original DSUE election to port and/or the amount of the DSUE available, and that return is now taxable, and the IRC 6501 status is no longer open If the tax assessment SOL under IRC 6501 is not open and the reviewed return would otherwise now be taxable, zero out any DSUE on the appropriate return, and close the DSUE-related return as a No Change with Adjustments. (No tax may be assessed.)

    Note:

    A DSUE reviewed return without an open statute cannot be closed agreed. It is also possible to examine a return with multiple DSUE review issues. Each relevant DSUE issue should be examined using the appropriate lead sheet, and closed with the scenario specific procedures. All DSUE related adjustments should be made to any affected returns.

Project and Delinquent Return Workpapers
  1. There may be special project and delinquent return workpapers included at the time the case is assigned. Otherwise, the Estate and Gift Notebook Job Aid (Notebook) has a section under lead sheets for Project and Delinquent Return Workpapers. The section contains initial contact letters, lead sheets, detailed instructions on the project, memos, and other data intended for the specific project.

  2. Documents found in the Project and Delinquent Return Workpapers section of Notebook should be used in cases with a tracking code indicating the case is a project case.

  3. The Estate and Gift SharePoint contains additional resources including Job Aids, and current project tracking codes for use when examining project and delinquent return cases

Schedule Q – Credit for Tax on Prior Transfers
  1. The taxpayer may take a credit for Tax paid on Prior Transfers (TPT). See IRC 2013. The credit would be claimed on the Form 706. In order to examine the accuracy of the credit the examiner may need to order historic gift or estate tax returns.

  2. The Schedule Q – Credit for Tax on Prior Transfers Lead Sheet should be used to document the examiner’s verification of the estate’s claimed credit for tax paid on prior transfers.

  3. The amount of the credit is the lesser of the "First Limitation" and the "Second Limitation" multiplied by a percentage that varies dependent on the length of time between the death of the transferor and the transferee. The first limitation is the amount of estate tax which the "amount passing" generated in the estate of the first decedent to die, the "transferor decedent."

  4. The second limitation is the amount of tax generated in the estate of the transferee as though the amount passing to him were already included in his estate. It is not required to identify the property in the transferee estate. It is only necessary that the property was included in the estate of the transferor, passed to the transferee, and was susceptible of valuation by recognized valuation principles at the date of transfer. Treas. Reg. 20.2013-1(a).

  5. The amount of the credit allowable is the lesser of the first limitation and the second limitation multiplied by a percentage based on the length of time between the death of the transferor and the transferee. After ten years the credit is eliminated completely.

  6. The governing principles for valuation of the property are analogous to those applicable to the valuation of property interests transferred for public, charitable, or religious uses. See Rev. Rul. 75-550, 1975-2 C.B. 357. There may also be an allowable TPT credit for tax paid as a result of transferred life estates valued under the IRC 7520 actuarial tables. The amount passing is then computed in the same manner as a marital bequest for purposes of the marital deduction in that estate taxes, administration expenses deducted on the Form 706, and administration expenses deducted on the Form 1041, as well as the debts of the estate, may all affect the computation.

  7. The allowable credit is determined by multiplying the lower of the first and second limitations by the applicable percentage. The applicable percentage is a fixed schedule ranging from 0 percent to 100 percent based on the time between the dates of death of the transferee and the transferor.

  8. The percentage limits are set based upon the amount of time since the transferor’s date of death. The credit is 100 percent allowed if the tax resulted from a transfer to a non-citizen spouse if a QDOT election was not made. The credit is also allowable at 100 percent where the transferee dies within two years prior to the transferor. The limitation periods are set based upon the passage of time since the transferor’s date of death:

    Time between the date of death of the Transferor and the date of death of the Transferee Percentage Credit
    > 2 Years 100 percent
    <= 2 Years, > 4 Years 80 percent
    <= 4 Years, > 6 Years 60 percent
    <= 6 Years, > 8 Years 40 percent
    <= 8 Years, > 10 Years 20 percent
    <= 10 Years 0 percent
Schedule U – Conservation Easements
  1. A conservation easement is a restriction on the use of real property through a recorded deed restriction, and the right to enforce the restriction is given to a tax-exempt charitable organization (generally in the conservation field) or a government agency. A conservation easement is reported on Schedule U, Qualified Conservation Easement Exclusion of the Form 706, United States (and Generation-Skipping Transfer) Tax Return.

    • The examiner should use the Schedule U Lead Sheet to document the examination of Schedule U issues in an Estate Tax case.

    • The pre-existing easement is a legal restriction on the use of the property that must be taken into consideration in a determination of highest and best use. The decedent may have created the easement during life. As a result, this easement may also affect the value of real property reported on Schedule A, Schedule F and/or Schedule G.

  2. In order for the estate to qualify for a conservation easement valuation reduction the contribution must be:

    • A qualified real property interest granted in perpetuity restricting the use of the property.

    • The easement must be granted to a qualified organization.

    • The easement is granted exclusively for conservation purposes. See IRC 170(h)(4)(A).

    • The land subject to the easement must be located within the United States or a United States possession.

    • A qualified easement must be made by the Decedent, a member of his/her family, the executor of the estate or the Trustee of a Trust that holds the land in question, at the time the election is made.

    • The land must have been owned by the Decedent or a member of his/her family at all times during the three year period that ends with the Decedents’ date of death.

    • Until the easement is recorded, the easement is not enforceable in perpetuity. See Treas. Reg. 1.170A-14(g)(1).

  3. A request for verification of the real estate value as returned, as well as the value of the portion of the real estate easement subject to the conservation easement, must be submitted to the Real Estate Appraisal Service and must be made through the Specialist Referral System (SRS). See IRM 4.25.12, Valuation Assistance. Before making an SRS referral the examiner should:

    1. Obtain copies of the recorded instruments, and research the property's ownership, sales and mortgage history. Recent sales or mortgages on the property that may provide insight into the easement value.

    2. Review the conservation easement deed.

    3. Confirm how title is held, as it may affect the amount that can be claimed as a charitable contribution by a taxpayer. The IRS appraiser will need to know the property owner of the eased property, any contiguous properties and any other properties owned by the taxpayer in order to properly apply the contiguous/enhancement rules in valuing the property.

    4. Obtain copies of the appraisal for the real property subject to the conservation easement as of the date of the creation of the conservation restriction, and copies of the appraisal for the real property subject to the conservation easement as of the fair market value date.

    5. Discuss with the IRS appraiser whether there were any preexisting restrictions on the property imposed by local or state ordinances, zoning or the rules of the historic districts. There may be no loss in value as a result of the granting of the easement if the easement does not impose new or expanded restrictions on the property.

  4. The examiner should also verify that the conservation easement calculation was done correctly and meets the limitation rules of IRC 2055.

State Death Tax Credits and Deductions
  1. The state death tax credit was repealed in the case of decedents dying after December 31, 2004, and replaced with a deduction allowable under IRC 2058 for state estate and inheritance tax paid, effective for decedents dying after December 31, 2004.

    1. For dates of death on or before December 31, 2004, the maximum credit for state death taxes should be computed and tentatively allowed unless precluded by an imminent statute of limitations date. If complete evidence has been submitted, the amount allowable is indicated in the "As Corrected" column, Line 13.

    2. If evidence substantiating the credit is incomplete, the total credit figure is entered in the block entitled "As Corrected." The portion of the credit which has not been substantiated is entered in the blank entitled "tentatively allowed credit." Where this box is used, enter same date shown on Form 890.

  2. Evidence of actual payment of state death taxes need not be secured when the Territory Manager is satisfied that local enforcement procedures for the collection of state death taxes are adequate. Procedures followed in the territories, incident to the verification of payment, may vary depending upon whether:

    1. The state had a pick-up tax equal to the federal credit, when there was a federal credit available.

    2. A separate inheritance tax is determined without regard to the federal tax, or other death duty.

    3. The territory has an effective program for exchange of information with the state taxing authority.

  3. If the Territory Manager is not satisfied with local collection procedures or where there is information from the state taxing authority that indicates the full amount of the state death taxes will not be paid, the Territory Manager should establish procedures for verifying all deductions claimed in the state.

  4. The examiner may verify the amount of the state death tax credit or deduction in the Estate and Gift Tax Notebook Job Aid (Notebook).

6166 Installment Election Lead Sheet
  1. Upon receipt of an IRC 6166 case, the Estate and Gift field group must verify and/or apply the appropriate ERCS project code:

    Project Code Designation
    1000 The case as an IRC 6166 case without an IRC 2032A election or a Family Limited Partnership issue case.
    1002 The case as both an IRC 6166 election and an IRC 2032A election.
    1003 The case has both an IRC 6166 election and a Family Limited Partnership issue(s).
    1005 The case as an IRC 6166 election, an IRC 2032A election and a Family Limited Partnership issue(s).

    Note:

    The project code should be removed or changed when it is determined that the estate does not qualify for the IRC 6166 election and the estate agrees with the determination.

  2. The examiner assigned to the case will determine whether the taxpayer has met the initial eligibility requirements to make the IRC 6166 election and will complete the Installment Payment Election Section 6166 Lead Sheet. This should be done as early as possible during the examination. The estate is eligible under IRC 6166(a) to make the election if the decedent was a United States citizen, the decedent’s interest in the closely held business exceeds 35 percent of the adjusted gross estate (not including passive assets), and the notice of election under IRC 6166 was attached to a timely filed estate tax return. The business must also qualify as a closely-held business, as defined in IRC 6166(b). In certain cases there may be additional eligibility requirements, see IRC 6166(b) - 6166(h).

  3. An estate and gift tax group manager will make a determination whether to examine the return or survey the return.

  4. It is the responsibility of the Estate and Gift field group to notify the estate whether or not its IRC 6166 election has been granted on examined returns.

  5. Examiners are not to solicit liens or bonds in IRC 6166 cases.

  6. At the conclusion of the examination the examiner should prepare and secure email the IRC 6166 lien package referral to Advisory and CCP. See IRM 4.25.11.2, IRC 6166 Installment Payment Elections.

International Return Issue Specific Lead Sheets

  1. Reserved.

Examination Process and Documentation Quick Reference Guide to Tools

Title Phase Required Contents
Estate Tax Mandatory Lead Sheet Throughout estate tax return examination Mandatory for Estate cases (Except for limited scope audit and some project cases) Provides a road map to the examination and case assembly order; identifies issues under examination; may document issue, facts, law, arguments, details examination activity related to minimum audit checks and addresses LUQ items, and conclusions; provides links, and indexes work papers
Limited Scope Audit Mandatory Lead Sheet Throughout limited scope audit Mandatory for Limited Scope Audits only Provides a road map to the examination and case assembly order; identifies issues selected for examination; documents issue, facts, law, arguments, and conclusions; provides links, and indexes work papers
Gift Tax Mandatory Lead Sheet Throughout examination of gift tax returns Mandatory for Gift Tax Return Examinations (except for limited scope audits and some project cases)used for Gift Tax Return Examinations) Provides a road map to the examination and case assembly order; identifies issues under examination; may document issue, facts, law, arguments, details examination activity related to minimum audit checks and addresses LUQ items, and conclusions; provides links, and indexes work papers
Activity Record, Form 9984 Throughout examination Yes Record all significant and meaningful case activity, dates, number of hours worked, and taxpayer rights provided.
Statute Verification Lead Sheet Within of 45 days of case receipt. See IRM 4.25.1.5.2, Efficient Resolution and National Standard Time-frames Yes Provides documented proof of statute verification
Estate Tax Attorney Plan to Close Check Sheet As steps are completed No Checklist of steps to help prepare for the Plan to Close discussion with the manager.
Manager Plan to Close Lead Sheet Within 120 days of starting the examination; may be used independently or as part of a workload or 4502 review. May not be required in all cases. Strongly encouraged Check list for Group Manager to document discussions and follow up actions.
Initial Taxpayer/ Representative Contact Check Sheet First telephone conversation with taxpayer or representative No List of discussion topics for initial meeting; provide space for comments if necessary.
Initial Appointment/ Meeting Agenda Initial appointment or meeting No List of discussion topics for initial meeting; provide space for comments if necessary.
Initial Interview Questions and Notes Pre-Audit No Blank lead sheet to record interview questions, responses, decedent's background and history.
Fraud Lead Sheet When indicators of fraud are present. If indicators of fraud are present Process check sheet
Penalty Approval Lead Sheet Examination when penalty issue exists that requires managerial approval for the assessment or abatement of a penalty. Managerial approval by signature required when recommending assessment of penalties not automatically assessable, or abatement of penalties. Checklist to indicate applicable penalties (and abatement) and managerial approval.
Issue Specific/ Generic Lead Sheets Throughout examination Yes Document classified, and after classification examination issues, facts, law, arguments, risk analysis and conclusions. The lead sheet should be tailored to the circumstances of each case.

Required Uploads to IMS

Document Uploaded to IMS Suggested Timeframe for Completing IMS Upload
First 3 pages of the Form 706, and any additional relevant pages At beginning of examination. This is not required if the return was scanned by WSD and is already in IMS at the time of assignment.
First page of Form 709, and any additional relevant pages. At beginning of examination. This is not required if the return was scanned by WSD and is already in IMS at the time of assignment.
Classification Sheet At beginning of examination
Mandatory Lead Sheet(s) (Estate, Gift, and/or Limited Scope Audit Mandatory Lead Sheet) At beginning of examination. Best practice - mandatory lead sheet worked within IMS throughout course of examination.
Statute Verification Lead Sheet Mandatory - within 45 days of case receipt. See IRM 4.25.1.5.2, Efficient Resolution and National Standard Time-frames. Lead Sheet updated within IMS as need. Example - Verification of statute as reported for completion of Form 895.
Issue specific Lead Sheets for each classified issue that is examined Uploaded at the beginning of the examination and completed in IMS throughout the examination. Best practice is to upload the lead sheet to IMS and edit the lead sheet within IMS.
Appraisals - key document provisions relied upon for valuation determinations. Before issuing the report to the taxpayer. If the case is referred to engineering, before engineering referral.
Appraisal/Support Services related documents (Risk Analysis, SRS referrals, OFA requests, etc.) During fact finding. If applicable, before referral to engineering.
Correspondence sent to taxpayer/representative, taxpayer created correspondence, and internal correspondence providing substantive information and pertinent to the audit trail. Throughout the examination.
Taxpayer created correspondence and attachments from the representative and/or taxpayer providing substantive information and pertinent to the audit trail. Correspondence includes email correspondence. If email is secured, PDF email before upload. Throughout the examination.
Form 2848/601 Declaration and proof of processing Prior to case closure
Manager Plan to Close, if applicable Group Manager responsible for ensuring document is uploaded to IMS prior to case closure.
Documents used to determine the reasonableness of conclusions made with regard to examined issues including spreadsheets, internal memos, or memos to the file. Prior to case closure. Best practice is to upload to IMS and edit the workpaper within IMS.
Handwritten or electronic notes used to determine the reasonableness of conclusions made with regard to examined issues. Prior to case closure. Best practice is to upload to IMS and edit the workpaper within IMS.
Manager-executed Penalty Approval Form and/or Fraud Lead Sheet, if applicable Prior to case closure
Form 895s after received executed form back from manager, if applicable Prior to case closure
All report forms (e.g., Form 3233, Form 1273, Form 6180, executed Form 890, Forms 886-A, etc.) and RAR XML/Zip file deployed from Notebook Prior to case closure
Case closing Forms (e.g., Form 3198, Form 5344 created using notebook, etc.) Prior to case closure
Executed 30-day Letter (unagreed case) Prior to case closure
Taxpayer's Protest(s) (unagreed cases) Prior to case closure
Rebuttal. Ensure that file is documented to show rebuttal was provided to the taxpayer. (unagreed cases) Prior to case closure
Relevant additional information provided by taxpayer related to unagreed issues Prior to case closure
Statutory Notice of Deficiency (90-day Letter) (unagreed cases) Prior to case closure

Note:

Documentation uploaded should substantiate changes included in the final tax report, risk analyses, and audit issues. The items listed in the table above is not all inclusive. The examiner’s group manager may authorize deviation from the table listed above, or may require additional uploads. Manager-authorized deviation from the requirements must be documented in the examiner’s IMS administrative case file (e.g., in Form 9984 or in an email message from the manager confirming the deviation, etc).