Estate Tax FAQ

What is “Fair Market Value?”

Fair Market Value is defined as: “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.” Regulation §20.2031-1.

When can I expect the Estate Tax Closing Letter?

There can be some variation, but for returns that are accepted as filed and contain no other errors or special circumstances, you should expect to wait about 4 to 6 months after the return is filed to receive your closing letter. Returns that are selected for examination or reviewed for statistical purposes will take longer.

Who should I hire to represent me and prepare and file the return?

The Internal Revenue Service cannot make recommendations about specific individuals, but there are several factors to consider:

  • How complex is the estate? By the time most estates reach $1,000,000, there is usually some complexity involved.
  • How large is the estate?
  • In what condition are the decedent’s records?
  • How many beneficiaries are there and are they cooperative?
  • Do I need an estate tax professional?

With these questions in mind, it is a good idea to discuss the matter with several estate tax professionals. Ask about how much experience they have had and ask for referrals.

This process should be similar to locating a good physician. Locate other individuals that have had similar experiences and ask for recommendations. Finally, after the individual(s) are employed and begin to work on estate matters, make sure the lines of communication remain open so that there are no surprises during administration or if the estate tax return is examined.

Finally, most estates engage the services of both attorneys and/or Enrolled Agents (EA). The attorney usually handles probate matters and reviews the impact of documents on the estate tax return. The EA often handles the actual return preparation and some representation of the estate in matters with the IRS. However, some attorneys handle all of the work.

EAs may also handle most of the work, but cannot take care of probate matters and other situations where a law license is required. In addition, other professionals (such as appraisers, surveyors, financial advisors and others) may need to be engaged during this time. Engaging these separate professionals is not the complete answer. They need to work on the same team.

What if I do not have everything ready for filing by the due date?

The estate’s representative may request an extension of time to file for up to six months from the due date of the return. However, the correct amount of tax is still due by the due date and interest is accrued on any amounts still owed by the due date that are not paid at that time.

Do I have to talk to the IRS during an examination?

You do not have to be present during an examination unless an IRS representative needs to ask specific questions. Although you may represent yourself during an examination, most executors prefer that professional(s) they have employed handle this phase of administration. They may delegate authority for this by signing a designation on the Form 706 itself, or executing Form 2848 “Power of Attorney”. Enrolled Agents and Attorneys are best suited to represent you against the IRS.

Foreclosure and EA

An Enrolled agent is the only tax practitioners licensed by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service (IRS) on issues including collection, audits and appeals.

When you look around at what the most current issues happening in our economy, country and local businesses it seems the importance of a qualified tax practitioner is something we all need. As an EA we are required to stay current on any and all tax issues that the public gets faced with.

Taking a closer look at the foreclosures and increasing amount of Short Sales on real estate, there are enormous repercussions ending with tax increases in the tens of millions of dollars.

Whether it is your main home or an investment property, there are rules and ways that you can protect yourself from having to pay thousands dollars from your hard earned money to the IRS for loosing property.

If you modified your property and received an addition to your income and ended up with a tax liability from that you know that in these uncertain times, you need someone who is on your side and not out to take from you and your family.

There are many exceptions to the Cancellation of Indebtedness Income that the 1099C attempt to make many Americans liable for those tens of millions of dollars those banks are anxious “forgive”.

If the house is your primary residence you can exclude a certain amount of that income. To qualify for primary residence you have to have owned and lived in the property for 3 out of the last 5 years.

The other most popular exemption is Insolvency. Insolvency is complicated due to the nature of the actual date of acquisition. The only way to verify a date of acquisition with the bank they will need to issue you a 1099A or you will need the selling contract and title paperwork. Once you have that you are only insolvent up to the amount your liabilities are more than your assets. Any amount that is forgiven over that could cause you some un-needed heartache.

Differences between a CPA and an EA

Many wonder what the differences are between a CPA (Certified Public Accountant) and an EA (Enrolled Agent).

That’s both an easy question and a hard question to answer. In short, CPAs have to know a great deal about auditing, accounting, tax, business law, valuation, personal finance, planning of various kinds and myriad other things. EAs have to know a great deal about taxes.

It may also help to know a little bit about how individuals become a CPA or an EA. Let’s start with the CPA first.

In order to become a CPA, an individual must have a degree (BA or BS). It’s helpful if it is in Accounting, Finance, Administration or Management. Then, they need to decide where they want to practice. A CPA is licensed on a state level and can only practice in that state. Once they decide where they want to practice, they have to take the exam, which is a pretty standardized exam regardless of the state.

Generally speaking, the exam consists of four sections, 250 questions each section, 1000 questions total: Here are the four general areas of knowledge and testing for the CPA exam:

  • Auditing and Attestation (AUD). This section covers knowledge of auditing procedures, generally accepted auditing standards and other standards related to attest engagements, and the skills needed to apply that knowledge.
  • Business Environment and Concepts (BEC). This section covers knowledge of general business environment and business concepts that candidates need to know in order to understand the underlying business reasons for and accounting implications of business transactions, and the skills needed to apply that knowledge.
  • Financial Accounting and Reporting (FAR). This section covers knowledge of generally accepted accounting principles for business enterprises, not-for-profit organizations, and governmental entities, and the skills needed to apply that knowledge.
  • Regulation (REG). This section covers knowledge of federal taxation, ethics, professional and legal responsibilities, and business law, and the skills needed to apply that knowledge.

As you can readily see, there is much more to the life and practice of a CPA than taxation. They are expected to know a lot more, but aren’t necessarily a tax expert.

Assuming they pass that rigorous, 4-part examination, they then have some practice requirements to meet, such as requirements to work under a practicing CPA for a specific period of time.

When CPAs take continuing professional education (CPE), they are free to choose from any number of general topics that they have an interest in, be that accounting, auditing, consulting services, specialized knowledge and applications, management, taxation and ethics.

What about an EA?

There are two ways to become an EA. One is to have worked for the IRS for a minimum of five years. The other is to pass a three-part exam and to undergo a thorough background check.

An EA needs no prior preparer experience in order to take the EA examinations, called the Special Enrollment Examination or SEE. They don’t need to even have filled out a return or ever have to once they become an EA. But they do have to have special competence in tax matters.

The following areas encompass the three exams, which are solely on taxation.

  • Part 1 – Individual (100 questions exclusively on the tax code for individuals)
  • Part 2 – Business (100 questions exclusively on the tax code for business entities)
  • Part 3 – Representation, Practice and Procedures (100 questions primarily on Circular 230, the Treasury Department guide for practicing before the IRS.)
  • The bottom line is that EAs must know pretty much everything on income taxes for individuals, small businesses, partnerships, C corporations, and S corporations, They also need to know about inheritance taxes, gift taxes, estate taxes, payroll taxes, and retirement plans as well as non-profits.

For more information on Enrolled Agents, their background and requirements, please view the Enrolled Agent page on our web site. For information about how we can represent you with tax issues, please see our Representation page at 5641040.com.

When Enrolled Agents take their required continuing professional education (CPE), which consists of 72 hours every three years (more if they are NAEA members), it must be 100% in taxation and the ethics of taxation.

When you compare the two designations, CPA or EA, you come to realize that for EAs, tax issues are their only specialty. Their mandatory continuing education is solely on taxation, which means that their focus is on that one topic and very little else, except for mandatory ethics.

The bottom line is: a CPA does not have the tax expertise of an EA.

Part of the problem we face as a tax professional is the public understanding of what these two designations mean and what expertise each one may possess. The reason may simply be that the average taxpayer does not know what an EA is or does. Simply stated, the definition of an EA is: “one who is RECOGNIZED by the IRS as a tax expert.”

Enrolled Agents are the only FEDERALLY Authorized Tax Professionals.

Wouldn’t you rather go to someone who knows taxes for a tax issue and to an accountant for an accounting issue?