Supplemental Estate Tax Returns

Supplemental Estate Tax Returns

Reg. section 20.6081-1(d) provides

§ 20.6081-1

    Extension of time for filing the return.

    (a) Procedures for requesting an extension of time for filing the return. A request for an extension of time to file the return required by section 6018 must be made by filing Form 4768, “Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes.” Form 4768 must be filed with the Internal Revenue Service office designated in the application's instructions (except as provided in § 301.6091-1(b) of this chapter for hand-carried documents). Form 4768 must include an estimate of the amounts of estate and generation-skipping transfer tax liabilities with respect to the estate.

    (b) Automatic extension. An estate will be allowed an automatic 6-month extension of time beyond the date prescribed in section 6075(a) to file Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return,” if Form 4768 is filed on or before the due date for filing Form 706 and in accordance with the procedures under paragraph (a) of this section.

    (c) Extension for good cause shown. In its discretion, the Internal Revenue Service may, upon the showing of good and sufficient cause, grant an extension of time to file the return required by section 6018 in certain situations. Such an extension may be granted to an estate that did not request an automatic extension of time to file Form 706 prior to the due date under paragraph (b) of this section, to an estate or person that is required to file forms other than Form 706, or to an executor who is abroad and is requesting an additional extension of time to file Form 706 beyond the 6-month automatic extension. Unless the executor is abroad, the extension of time may not be for more than 6 months beyond the filing date prescribed in section 6075(a). To obtain such an extension, Form 4768 must be filed in accordance with the procedures under paragraph (a) of this section and must contain a detailed explanation of why it is impossible or impractical to file a reasonably complete return by the due date. Form 4768 should be filed sufficiently early to permit the Internal Revenue Service time to consider the matter and reply before what otherwise would be the due date of the return. Failure to file Form 4768 before that due date may indicate negligence and constitute sufficient cause for denial of the extension. If an estate did not request an automatic extension of time to file Form 706 under paragraph (b) of this section, Form 4768 must also contain an explanation showing good cause for not requesting the automatic extension.

    (d) Filing the return. A return as complete as possible must be filed before the expiration of the extension period. The return thus filed will be the return required by section 6018(a), and any tax shown on the return will be the amount determined by the executor as the tax referred to in section 6161(a)(2), or the amount shown as the tax by the taxpayer upon the taxpayer's return referred to in section 6211(a)(1)(A). The return cannot be amended after the expiration of the extension period although supplemental information may subsequently be filed that may result in a finally determined tax different from the amount shown as the tax on the return.

    (e) Payment of the tax. An extension of time for filing a return does not operate to extend the time for payment of the tax. See § 20.6151-1 for the time for payment of the tax, and §§ 20.6161-1 and 20.6163-1 for extensions of time for payment of the tax. If an extension of time to file a return is obtained, but no extension of time for payment of the tax is granted, interest will be due on the tax not paid by the due date and the estate will be subject to all applicable late payment penalties.

    (f) Effective date. This section applies to estates of decedents dying after August 16, 1954, except for paragraph (b) of this section which applies to estate tax returns due after July 25, 2001.

   [T.D. 8957, 66 FR 38546, July 25, 2001]

In general, a “supplemental return” is one that is prepared and filed after the termination of the 6-month extension of time to file that was automatically granted when Form 4768 was timely filed. For estates with ongoing §6166 elections (or other estates), a supplemental return usually reports additional administration expenses and a reduction in tax. However, supplemental returns are also used to report additional assets or changes in the values of previously reported assets or deductions.

Supplemental Returns, Comment 1: With on-going section 6166 elections, the 3-year rule for assessing additional tax continues to apply notwithstanding the 14-year extension of time to pay the estate tax in installments. A supplemental return reporting additional assets could be filed after the 3-year period has expired, but (assuming there was not a 25% omission situation) the additional tax could not be assessed. However, if supplemental returns were to be filed in the future to report additional deductions, the resulting tax decreases would be offset to the extent of the additional tax that should have been assessed based on the previously reported additional assets, but which could not have been assessed at the time. See IRM 4.25.9.4.3.1, below.

Conversely, with on-going section 6166 elections, supplemental returns may be filed to report tax decreases resulting from additional deductions throughout the full 14-year extension period, plus 2 years after the last payment was tendered. The resulting tax decreases will be assessed each year.

An estate should be alert to Rev. Proc. 81-27, which posits annual supplemental return filings to report the tax decreases resulting from the additional deductions. Should an estate in such a situation wait until the very end of the 14-year period to file a single supplemental return to report all of the deductions, it would have paid more tax and interest in each preceding year than it would have paid had annual supplemental returns been filed, and application of the 2-year rule would likely prohibit a full refund of the overpaid tax and interest.

 

Supplemental Returns, Comment 2:  Generally, when IRS completes a field examination of the estate tax return, all of the sections 2053 and 2054 deductions then identified are incorporated in the computation of the estate tax and are treated as relating back to the original return. This would include additional attorney fees, since the amount reported on the original estate tax return is only an estimate. Such deductions would generally be incorporated in the section 6166(b)(6) adjusted gross estate computation.

However, not all of these deductions may be properly included in the section 6166(b)(6) adjusted gross estate computation. Exceptions would include:

  • Interest accrued after the return filing date on loans.  Such interest is deductible on Schedule J of the return (computed through the field examination conclusion date or as otherwise accrued), but only the portion accrued on the return filing date is included in the 6166(b)(6) adjusted gross estate computation. If such loan was originated after the date the return was filed, then zero loan interest would have been accrued on the return filing date and no part of the loan interest would be included in the 6166(b)(6) adjusted gross estate computation. This rule should also be applied to interest on Graegin loans.
  • Interest accrued on unpaid state death tax. The same rules would apply as for interest accrued on loans, above, except that interest on the state tax would be accruing from the state return filing due date forward, and a portion thereof would be included in the 6166(b)(6) adjusted gross estate computation.

 

Supplemental Returns, Comment 3:  The situation is different for supplemental estate tax returns filed after the conclusion of the IRS field examination in on-going section 6166 elections.

  • Additional attorney fees and other costs directly related to preparation of the supplemental return are not includible in the section 6166(b)(6) adjusted gross estate computation because they relate to events occurring after the original return was filed. These additional fees remain deductible on the estate tax return itself, however, and reduce the tax accordingly. As the tax is changed, so, too, is the amount of tax deferred under the section 6166 election, which necessitates a recalculation of all the interest payments due for prior periods and the installment payments.

 

Page 4 of the Instructions for Form 706 describes how a supplemental estate tax return should be prepared. (Note: The Instructions use the word “Amending”, which technically is not correct – the word should be “supplemental”.) The specific instructions given are:

Amending Form 706

If you find that you must change something on a return that has already been filed, you should:

  • File another Form 706;
  • Enter “Supplemental Information” across the top of page 1 of the form; and
  • Attach a copy of pages 1, 2, 3, and 4 of the original Form 706 that has already been filed.

If you have already been notified that the return has been selected for examination, you should provide the additional information directly to the office conducting the examination.

In practice, the IRS treats returns marked “Amended” as supplemental returns.

See Revenue Procedure 81-27, 1981-2 C.B. 548.

IRM 4.25.2.1.24 (2009) formerly set out the Cincinnati Campus procedures for processing supplemental returns for estates of decedents dying before Jan-01-1998 with §6166 elections in place. Although interest on Federal tax deferred under §6166 is not deductible for estates of decedents dying after Dec-31-1997, there are situations where post-filing interest (e.g. interest on extended payments of state death tax) will nevertheless be allowed as deductions in calculating the tax, which will continue to require the filing of supplemental returns. This IRM provision is now found in IRM 4.25.2.4.3.12 (8-30-2018). The only cases today involving pre-1998 computation scenarios would involve active claims for refund.

NOTE: If the original estate tax return was Accepted as Filed (i.e. the return was not audited by IRS) and a closing letter was issued, a subsequent supplemental estate tax return could cause IRS to take a closer look at the original return. A refund that might have resulted from the supplemental return adjustments alone could be offset by changes made elsewhere in the return. A deficiency might even be the result. In general, see IRM 4.25.9.4.3, which provides:

4.25.9.4.3  (01-07-2014)
Report Writing Procedures for Claim Examinations

1. There are four possible results when a claim is examined. The claim may be:

  • Allowed in full
  • Disallowed in full
  • Partially allowed, or
  • Offset by other adjustments

2. Before preparing a report on a case involving a claim, examiners must have a current transcript of the taxpayer’s account.

  • If the claim is the result of a prior audit or assessment, TC 300 or TC 290 with a dollar amount will be posted. The "as adjusted" figures shown on the original report will be used as the starting point.
  • If the claim has already been allowed by the service center, TC 291 with a dollar amount will be posted.