Avoiding estate tax return claims

Late-filing penalties for estate tax returns are often used as grounds for professional liability claims against CPAs, in large part because of their cost: Given the steeply progressive tax rates for estate tax and rapidly accruing penalties, they often exceed $300,000. Here are some tips for avoiding penalties….

There are several factors that may cause a preparer to miss the deadline, the most common of which is the irregular filing due date for estate tax returns—it comes nine months after the decedent’s date of death, rather than, for example, April 15 or October 15.

To avoid such penalties, consider the following:

  • Implement a due date tracking system. This can be as simple as a calendar devoted solely to estate tax return due dates.
  • Have at least one person be primarily responsible for tracking estate tax return filing deadlines, rather than having each tax partner or tax manager track his or her own deadlines.
  • Continually review the estate tax return tracking system to ensure that your firm meets any impending due dates.

While the estate tax return filing calendar is simple and relatively inexpensive, it can be effective in reminding your firm of the impending due dates, as long as it’s placed in a conspicuous, frequently viewed location.

Another common cause of late filings for estate tax returns or failing to pay estate taxes on time—and the resulting penalties—is the failure of the estate to provide adequate and timely information about estate assets in order to prepare a return or to marshal assets to pay the tax. The CPA who has been retained to prepare the return is left holding the bag when large penalties are assessed, due to the negligence of the estate’s executor, trustee or attorneys. Sometimes, there are disputes about estate assets or other complications that can distract the CPA from filing the return on time.

In one case involving a large estate inherited by the client, the bulk of the estate was a majority partnership in a successful business, but the newer minority partners felt that their interests had been undervalued, compared to the majority interest.

The dispute went into litigation right in the middle of tax season, and the CPA delegated the monitoring of the litigation to his assistant, who became ill before he could log the estate tax return due date on the calendar devoted to such due dates. About a year later, the litigation had been resolved, and the due date had been missed by several months. The late payment penalties came to about $200,000.

If you know that the return is not going to be filed on time, it is critical to 1) estimate the amount of estate tax that will be owed, based on the best information you have; 2) make sure that this tax is paid to the IRS before the due date of the return [nine months after the date of death], along with the extension of time to file; and 3) document your file with correspondence to the client, outlining the nature of the estimate and why it was necessary.

If cooperation from the estate or its agents is lacking, consider disengaging well in advance of the return filing due date, payment due dates or extended due dates. If disengagement is not possible, consider timely filing the estate tax return, based on estimates when the information needed to create a complete return is missing or not available.

Be sure to report claims and potential claims as soon as possible. CAMICO encourages CPAs to contact the company in a variety of ways. For example, a 50 percent reduction in the deductible, up to $50,000, is provided for the early reporting of a potential claim during the policy period in which it becomes known. Further, if it is determined that it is appropriate to retain legal counsel to assist with a potential claim situation, CAMICO will absorb the legal expenses, help policyholders achieve a resolution with the client, prepare a tax penalty abatement request, draft talking points for communicating the facts of the situation with the client, and provide subpoena and other consultation services if the need arises.

In the event a potential claim is not timely reported by the insured, CAMICO’s "continuity of coverage for potential claims" helps eliminate coverage gaps for potential claims known to an insured and not timely reported by the insured, while coverage is consecutively renewed with CAMICO. However, the 50 percent deductible reduction for early reporting would not apply.

The information provided is a general overview and not intended to be a complete description of all applicable terms and conditions of coverage. Actual coverages and risk management services and resources may vary and are subject to policy provisions as issued. Coverage and risk management services may vary and are provided by CAMICO and/or through its partners and subsidiaries.

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