A fee proposal by the IRS has caught some estate planners by surprise, and led to speculation that further changes may lie ahead.
When an estate tax return is filed, the IRS has traditionally issued an estate tax closing letter, generally after review of the return. The agency is now proposing a $67 user fee to request a closing letter to help it defray costs. The letter helps executors and estate representatives determine if they’re liable for distributing or applying estate assets when there are unpaid estate taxes due.
Critics call it an irksome, before-the-service fee that comes at a time when there is rampant speculation about what changes may lie ahead in the estate planning field with a new president.
“It’s too early to say whether this is the start of a pay-for-service approach to recouping costs by the IRS or just an attempt to deter professionals from requesting this form,” said Gerry Joyce, New York-based national head of trusts and estates for Fiduciary Trust International.
“Requesting a closing letter became the accepted way of showing that the executor or personal representative had filed and paid the correct amount of estate taxes,” Joyce said. “What isn’t very well known is that it’s not any more useful as a practical matter than the IRS account transcript.” For a transcript, clients just send a request to the IRS.
Both the closing letter and transcript can be modified in the event of fraud or concealment, an administrative error or a decision contrary to an IRS position. “Many professionals will rethink whether they need a closing letter given the fee and the time and effort, as well as the delay involved in obtaining a closing letter compared to the transcript,” Joyce said.
Morris Armstrong, an RIA at Armstrong Financial Strategies in Cheshire, Conn., added that “the government is within its rights, and some would emphatically argue that they should charge a fee for some of the services that they provide. I pay a fee for the privilege of having the ability to prepare a return for someone."
The IRS has also long charged a fee for private letter rulings, where a taxpayer presents their situation and asks for a clarification or determination of the tax consequences. “If you’re a company that decides to perhaps change an accounting method, you may have to pay a fee to the Treasury. These can run into hundreds of thousands of dollars,” Armstrong said.
Estate tax in general are under pressure from many sides in the aftermath of a watershed election. “The estate tax is another political hot potato that raises little revenue but is emotionally charged for many taxpayers,” said Daniel Morris, a CPA and senior partner at Morris + D’Angelo CPAs in San Jose, Calif.
California has proposed legislation to create its own estate tax, which would be applied at $3.5 million.
“This tax,” Morris said, “especially in California, would trap a large number of upper-middle-class families and that would be a surprise for many families who never perceive themselves as wealthy.”
The big concern of estate-planning clients of Rob Seltzer, a CPA at Seltzer Business Management in Los Angeles, is possibly losing the step-up in basis. Many of his clients have elderly parents who’ve owned their homes for years and have cost bases that are a fraction of fair market value. And the current exclusion is more than $11 million per person. “Most would not pay estate taxes but would be subject to huge capital gains taxes when the property is sold if the step-up no longer exists,” Seltzer said.