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Internal Revenue Service inconsistent about estate reviews

There’s an old saying that nothing is certain in life except death and taxes. However, if the latest reports from the U.S. Treasury are any indication, taxation after death may be less a certainty and more a result of a dice roll.

Investigations into the Internal Revenue Service (IRS) procedures for handling the reviews of gift and estate taxes say that the system is arbitrary at best and compliance efforts by examiners have debatable effects.

Officially, the IRS is supposed to select a number of tax returns that show gift transfers or estate transfers for additional review after they’ve been processed. The idea is to try to catch those returns that haven’t quite met the requirements or have any number of other irregularities. There’s a lot of money involved in these reviews. For example, the agency estimates that there is about $1 billion in tax dollars that should be assessed through gift or estate tax on 2016 returns alone.

Unfortunately, there’s no real way of telling which returns will pass muster the first time and which will get pulled for review. Once they do get reviewed, there’s no way to determine if the agency’s examiner is going to treat each case the same as any other case.

Under the current system, exactly one IRS employee has the job of selecting and assigning cases to examiners. The report on the agency’s performance indicates that examiners follow guidelines for review less than 50 percent of the time. In addition, the documentation they do of their reviews are often incomplete or unreadable.

This means that taxpayers could be suffering from shoddy reviews and a haphazard manner of treatment. Previous agency initiatives toward quality management only focused on timeliness and documentation. While that resulted in a faster review process, there’s no indication that it made any difference in actual quality.

As a result the Treasury has made recommendations for improvement to the entire gift and estate tax examination process, which the agency has accepted. How well those changes are implemented, however, remains to be seen. In the meantime, taxpayers should be wary.

Source: accountingtoday.com, “IRS faulted on scrutiny of estate and gift tax returns,” Michael Cohn, accessed Feb. 27, 2018