Processing Improvements Have Helped Ensure United States
Estate Tax Return Filers Receive the Maximum Allowable Credits
July 2004
Reference
Number: 2004-30-120
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
July
14, 2004
MEMORANDUM FOR
COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: Gordon C. Milbourn III /s/ Gordon C.
Milbourn III
Acting Deputy Inspector
General for Audit
SUBJECT: Final Audit Report - Processing
Improvements Have Helped Ensure United States Estate Tax Return Filers Receive
the Maximum Allowable Credits (Audit #
200330029)
This
report presents the results of our review of the processing of allowable
credits on United States Estate Tax Returns (Form 706). The overall objective of this review was to evaluate the effectiveness of the Internal Revenue
Service’s (IRS) corrective actions taken
in response to the recommendations in a prior Treasury Inspector General for
Tax Administration report. This
included evaluating the actions planned or taken to update or create necessary
computer programs, processing procedures, tax forms, instructions, and
publications related to Form 706.
In summary, the IRS effectively
implemented the corrective actions agreed to in our prior audit report. In that report, we determined that
understatements of unified credit amounts, which resulted in incorrect estate
taxes, were not identified and adjusted during processing. During this review, we found the IRS’
corrective actions effectively ensured filers received the maximum unified
credit amounts in accordance with tax
law changes.
Since we are making no recommendations in this report, a
response was not required. However, key
IRS management officials reviewed the report prior to issuance.
Copies of this report are also being
sent to the IRS managers affected by the report. Please contact me at (202) 622-6510 if you have questions or
Philip Shropshire, Acting Assistant Inspector General for Audit (Small Business
and Corporate Programs), at (215) 516-2341.
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Taxpayers who give money or property during their lifetimes may be
subject to Federal gift tax. Further,
the money and property owned by a taxpayer at date of death (the estate) may be
subject to Federal estate tax. A taxable
estate is a decedent’s gross estate less allowable deductions. The executor of a decedent’s estate uses a United States Estate Tax Return (Form 706) to compute the estate tax imposed by the
Internal Revenue Code. The Form 706 must be filed
within 9 months of a taxpayer’s date of death.
The Form 706 allows a
taxpayer or executor to subtract a “unified credit” from the gift tax or estate
tax owed, thereby reducing or eliminating the tax. If a taxpayer does not use the entire maximum allowable unified
credit during his or her lifetime to reduce or eliminate gift taxes, the estate
can use the remainder to reduce or eliminate estate tax upon the taxpayer’s
death. The Taxpayer Relief Act of 1997
provided for gradual increases to the maximum unified credit amounts that can
be used to reduce a taxpayer’s estate tax.
The allowable unified credit amount for Tax Years (TY) 2002 and 2003 was
$345,800. This amount is scheduled to
increase until it reaches $1,455,800 in TY 2009.
Increases in the
unified credit amount affected the processing of approximately 120,000 estate
tax returns filed in Fiscal Year 2002.
These returns accounted for approximately $25 billion in gross tax
revenue.
A Treasury Inspector
General for Tax Administration report issued in 2000 identified problems with
the Internal Revenue Service’s (IRS) procedures for handling estate tax
returns. Procedures did not cover the
processing of older versions of the Form 706, which had incorrect pre-printed
unified credit amounts for the years being filed. As a result, understatements of the unified credit amounts, which
resulted in incorrect estate taxes, were not identified and adjusted during
processing. We estimated that, without
corrective actions, approximately 1,250 estates of entitled decedents would
overpay $11.6 million in TY 1999.
Our audit work for the current review was conducted at the Brookhaven Campus during the period November 2003 through March 2004, covering work performed by the Cincinnati Internal Revenue Service Campus (CIRSC). The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
We determined that the IRS effectively implemented the
corrective actions agreed to in response to our prior audit report. The IRS effectively updated necessary
processing procedures, tax forms, and instructions related to Form 706 and
associated unified credits. The IRS
effectively updated Internal Revenue Manual (IRM) instructions for processing
Form 706 to reflect the correct associated unified credit amount limitations
and exclusions. Form 706 and related
instructions were effectively revised to help filers determine the correct
unified credit amounts. In addition,
due to the IRS’ ongoing reorganization and centralization of campus sites, the
CIRSC was chosen to process the Forms 706.
All IRM sections, instructions, publications, forms, and web sites
effectively gave reference to the new processing site address for Form 706.
The IRS also successfully updated or created the necessary computer programs to accurately process the unified credits. The Requests for Information Services, the documents submitted to request computer program changes, were timely submitted. We verified that the correct tax law provisions regarding the unified credit amounts were programmed through TY 2009.
In addition, the IRS effectively educated taxpayers about
changes in the estate tax credits through publications and web sites. The IRS publication Introduction to
Estate and Gift Taxes (Publication 950; revised March 2002) was revised
effectively with tables and instructions for determining the correct unified
credit amounts through TY 2009. The IRS
Small Business/Self-Employed Division web site gives comprehensive explanations
of estate tax, the associated unified credit, and applicable exclusion amounts
through TY 2009.
We also verified, through reviews
of processed returns and outgoing notices, that taxpayers received the correct
unified credit amounts.
·
We reviewed a judgmental
sample of 100 Forms 706 for TYs 2002 and 2003 and found that filers received
the correct unified credit amounts in accordance with tax law provisions.
·
We researched all 138 estate
tax accounts for Forms 706 processed in July 2003, 85 of which had claimed
unified credits. Of the 85 accounts, 83
were available for research and showed correct unified credit amounts for the
date of death in accordance with tax law provisions. Although tax returns were not available for review for the
remaining two accounts, there was no indication that the credits were
incorrect.
·
We monitored outgoing notices
from the CIRSC Notice and Review function to identify any Forms 706 with
unified credits that were printed during the periods October 2002, January and
October through December 2003, and February 2004. We determined the IRS accurately corrected unified credit amounts
on Forms 706 that were filed incorrectly and sent explanatory notices to the
administrators of the estates.
Appendix I
Detailed Objective, Scope,
and Methodology
The overall audit objective of this review was to
evaluate the effectiveness of the corrective actions taken in response to the
recommendations in a prior Treasury Inspector General for Tax Administration
report.
To accomplish the objective, we:
I.
Determined whether corrective measures had been taken by the Internal
Revenue Service (IRS) to ensure filers of United States Estate Tax Returns
(Form 706) receive the correct unified credit amounts.
A.
Reviewed
corrective actions taken to resolve processing problems as a result of previous
audit findings and recommendations.
1. Reviewed the response to the original report to identify which findings required corrective actions by the IRS and identified how and when the corrective actions were implemented.
2. Evaluated the adequacy and effectiveness of corrective measures taken.
B. Interviewed appropriate personnel in the Customer Account Services, Subject Matter Experts for Code and Edit and Error Resolution, and Notice and Review functions at the Cincinnati Internal Revenue Service Campus (CIRSC) to determine whether the necessary changes had been made. We determined whether the tax forms, instructions, and publications had been revised to help taxpayers comply with the tax laws.
C. Determined whether the applicable Requests for Information Services requesting computer program changes had been submitted and whether computer programs had been changed and were in place to ensure timely and accurate processing of Form 706.
II. Determined whether Form 706 filers received the
correct unified credit amounts in accordance with tax law provisions.
A. Selected samples of Forms 706 from the CIRSC using a Business Master File (BMF) extract. Using a randomly selected judgmental sample of Forms 706 for each of Tax Years 2002 and 2003, we determined through research of IRS records whether associated unified credit amounts were in accordance with tax law change provisions. Judgmental sampling was chosen due to time constraints.
B. Reviewed all 34 outgoing notices identified by the CIRSC Notice and Review function that involved Forms 706 with unified credits which were printed during the periods October 2002, January and October through December 2003, and February 2004. We determined whether the notices reflected accurate unified credit amounts through research of IRS records. We also determined whether the IRS accurately adjusted any unified credit amounts on the Forms 706 that were incorrect and sent explanatory notices to the administrators of the estates.
C. Performed a preliminary survey using an
extract of all Forms 706 processed to the BMF for July 2003. Of the 138 records, 85 were found with
unified credits. We determined through
research of IRS records whether the unified credits were correct according to
the date of death.
Appendix II
Major Contributors to This Report
Philip Shropshire, Acting Assistant Inspector
General for Audit (Small Business and Corporate Programs)
Richard J. Dagliolo, Director
Robert K. Irish, Audit Manager
Margaret F. Filippelli, Lead Auditor
Paul R. Baker, Senior Auditor
John J. Chiappino, Senior Auditor
David Clous, Information Technology Specialist
Ronald Stuckey, Information
Technology Specialist
Appendix
III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy
Commissioner for Services and Enforcement
SE
Acting Deputy Commissioner, Small Business/Self-Employed Division SE:S
Director, Customer Account Services, Small Business/Self-Employed Division SE:S:CAS
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Management Controls OS:CFO:AR:M
Audit Liaison: Commissioner, Small Business/Self-Employed Division SE:S