Saturday, August 3, 2013

Estate Tax Audits by the IRS

Income Tax Audits and Estate Taxes


There is something special about an income tax audit by the IRS (Internal Revenue Service) that causes more stress and anxiety than many other financial events. The possibility of tax returns being audited is actually quite rare so in most cases the stress levels are relatively unwarranted. 

The one tax return area that seems fully-deserving of a taxing level of anxiety is estate taxes. I could not help but sit up and take notice when I saw the most recent tax return examination data reported by the IRS. Just keep these two numbers in mind: 30% and over 100%. (How can you have over 100%, you might ask?)

It is normal for tax return audits to be based on a small representative sampling of all available returns. For higher incomes, this is usually between 2% and 3%. However, for estate tax returns this number becomes 30%. As representative samples go, this is a very big number. But because audits of estate taxes also frequently result in reviewing tax returns for previous years as well, the total audit percentage for larger estates (over $10 million) is closer to 110%.

Perhaps that IRS tax audit anxiety is closer to fact than fiction after all is said and done.