Form 706: The Not-So-Simple Estate Tax Return

Knowing the risks of estate tax work may save you from a costly malpractice claim. The old adage that nothing is certain in life except for death and taxes may be the motto for CPAs who choose to do estate tax work. But life's certainties can bring the uncertainties of potential lawsuits if practitioners fail to exercise care when engaged to file form 706, the U.S. Estate (and Generation-Skipping Transfer) tax return--a simple form that can give CPAs a load of problems. It's no surprise that tax work is an area that puts CPAs at greater risk for lawsuits, but estate tax work results in a disproportionately high rate of malpractice claims. In our company, approximately 12% of all tax claims come from estate tax work. This statistic is particularly alarming when compared with the high number of individual tax returns filed each year: The U.S. Department of Treasury reported that more than 110 million form 1040s were filed in 1994, compared with only 40,000 form 706s. Of the total dollars CAMICO paid to claims, 13% went to estate tax claims--the fourth highest in severity. CAMICO statistics showed that individual income tax claims had the third highest severity, averaging $66,000 a claim. Financial statement compilation-related claims averaged $158,000 a claim, and audit-related claims averaged $348,000 each, logged second and first place in severity. The estate and individual income tax claims have been disproportionately costly considering they arise from individuals rather than businesses, where big ticket audit and compilation claims originate. The frequency and severity of estate tax claims provide good reasons to pause before including estate tax work in your scope of services. Although it can be very lucrative, it is important to proceed with caution. While form 706 itself seems relatively simple to prepare, its nuances make it extremely complex. There are several areas that have an especially high potential for error. Following are some red flags CPAs should look out for when preparing estate tax returns. DON'T MISS THAT DATE The form 706 deadline is nine months after the date of death. Estate executors can obtain a six-month extension (form 4768) for filing the form, but the tax is still due at the end of nine months unless an application to extend the payment is made on form 4768. There is a standard penalty if the executor does not meet the filing deadline or makes late payments: 5% per month of the amount of tax due for the late filing penalty and 0.5% per month of the tax due for late payments. Remember also other returns, such as a final-year individual income tax return or an estate income tax return. It's possible to miss deadlines because of miscommunication. Since attorneys and CPAs often work together on one estate, important deadlines can be missed if it is unclear which party is responsible for filing the appropriate extension or return. Engagement letters easily clarify the CPA's responsibilities. Not only does the engagement letter put both the attorney and the client on notice that there is unresolved business, such as filing deadlines, it serves as an excellent written defense against any claim resulting from missed return filings the CPA was not engaged to prepare. There may be legitimate reasons for delayed filings, such as disagreements over the value of a very large asset. CPAs should advise clients to deposit enough money before the filing deadline to cover the expected tax. Because both the late payment and late filing penalties are calculated based on the tax unpaid at the payment deadline, both penalties are avoided if the tax payments exceed the expected tax. For example, if the CPA estimates the total tax due is $100,000, and tax payments at the payment deadline equal $90,000, the penalty will apply only to the $10,000 unpaid portion. THE QUANDARIES OF QTIPS While penalties for late filings can be stiff, mistakes in determining the tax due can be equally disastrous. …

Field of study: Business