Closing Letter vs. Account Transcript — Which is Better?


 

Still frustrated about the new process for obtaining an estate tax closing letter? The IRS heard your concerns and issued Notice 2017-12, suggesting an alternative method to confirm the closing of an estate — but does the alternative method make the process any easier for executors and their advisors?

On June 16, 2015, the IRS quietly updated the Frequently Asked Questions on Estate Taxes on its website changing the process for obtaining an estate tax closing letter. The updated website provided that for estate tax returns (Form 706) filed on or after June 1, 2015, a closing letter will be issued only upon request by the taxpayer. The taxpayer may make the request after waiting at least four months after the filing of the return and then by calling a phone number. Previously, the IRS automatically sent a closing letter. According to the IRS, discontinuing the automatic letters was due to an increased number of estate tax returns that are filed solely to claim portability, which were tying up the IRS’s limited resources.

An estate tax closing letter is a written communication from the IRS that (1) confirms that the estate tax return has been accepted by the IRS; (2) specifies the amount of the net estate tax, the state death tax deduction, and any generation-skipping transfer tax for which the estate is liable; and (3) indicates that the estate tax return examination is closed. Executors often need a closing letter as proof that the IRS has reviewed and accepted the estate tax return, usually to close probate proceedings and make distributions to beneficiaries, to transfer title of property, or to receive a closing letter from state taxing authorities. Executors and their advisors were unhappy with the new procedure because it would add one more item on their “to do” list in settling an estate.

The Notice formally announces that another method is available to confirm the closing of an examination of an estate tax return.  The guidance suggests that an account transcript may substitute for an estate tax closing letter and is available at no charge. The Notice described an account transcript as follows:

An account transcript is a computer-generated report that provides current account data. The information reported on an account transcript includes, but is not limited to, the return received date, payment history, refund history, penalties assessed, interest assessed, the balance due with accruals, and the date on which the examination was closed.

An account transcript presents its data with transaction codes and descriptions of these codes. An account transcript with code “421” and the explanation “Closed examination of tax return” indicates that the examination of the estate tax return has been completed and is closed. To request an account transcript, executors file Form 4506-T by mail or fax, but no earlier than four months after filing the estate tax return.

Is requesting an account transcript any easier than requesting a closing letter? It certainly is if an executor would have requested an account transcript anyway. Otherwise, filing a form versus making a phone call seems equally, if not more, administratively burdensome. However, there are pros and cons to both methods. In requesting an account transcript, the executor or advisor will have a written record that a request was made and there is less room for error from speaking over the phone. On the other hand, unless use of the account transcript code becomes the new normal, it may not be a sufficient substitute for many estates. For example, states that have an estate tax all require (often by statute) a copy of the closing letter from the IRS, but it is unknown whether the state taxing authorities will now allow an account transcript code instead. Both methods seem to leave executors and their advisors still unsatisfied. Which method do you prefer?