Estate Tax Filing & Compliance While Avoiding IRS Penalties.
Don’t let a late or incomplete Form 706 cost your family thousands. Our guide shows you how to protect your estate from costly IRS penalties and audits with proper documentation.
Want to Avoid IRS Penalties and Keep Every Dollar Intact?
We Can Help You Navigate the Complexities of Estate Tax Filing. Derek passed unexpectedly. His wife, Nancy, found herself navigating an estate worth $14.2 million. Their accountant submitted IRS Form 706 late and failed to document several valuations properly. No appraisals accompanied the real estate or artwork. No backup for family limited partnership discounts.
Ten months later, the IRS issued a deficiency notice with penalties exceeding $430,000. Probate stalled. Nancy was forced to liquidate a Roth conversion account and part of a brokerage portfolio to satisfy the IRS claim. A preventable reporting oversight dismantled decades of planning.
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Understanding IRS Form 706 and Its Crucial Timelines:
IRS Form 706—the United States Estate (and Generation-Skipping Transfer) Tax Return—must be filed within nine months of the decedent’s date of death if the estate exceeds the federal exemption threshold. For 2025, that figure sits at $13.99 million per individual. Filing extends exemption portability to a surviving spouse and allocates the GST exemption appropriately.
Think of Form 706 as the estate’s financial confession. Any inaccuracies in this confession can invite an audit. From my years of experience, incomplete or late filings create avoidable tax exposure. Remember, extensions only delay filing, not payment. So, it’s crucial to treat Form 706 with the utmost accuracy and completeness.
California Probate Code §8800 mandates that inventory and appraisement of the estate be filed with the court within four months, aligning with federal requirements. Coordination is critical.
What Happens If IRS Form 706 Is Filed Incorrectly?
Incorrect submissions often trigger IRS correspondence audits. Missing valuations, ambiguous deductions, or mathematical errors increase scrutiny. Estates lose exemptions, discounts, or portability if filings lack supporting documentation.
From our firm’s extensive case reviews, IRS audits affect 8.5% of Form 706 filings exceeding $10 million (IRS Statistics of Income Report, 2023). Most involve improper appraisal methods or discount applications.
Visualize an estate return like a suspension bridge—each figure a tension cable. One weak link and the structure collapses under the weight of the IRS.
The Vital Role of Qualified Appraisals in Estate Tax Filing:
Real property, closely held stock, tangible personal property, and limited partnership interests require defensible valuations. A “qualified appraisal” must meet IRS standards under IRC §170(f)(11) and be completed by a certified appraiser.
Appraisals serve as the estate’s evidence. They are like a passport-essential for entry. Without them, deductions can evaporate. The IRS may adjust reported values to market comparables or cost basis, increasing the taxable estate size and triggering additional penalties. So, remember, qualified appraisals are not just a requirement, they are your best defense.
Think of an appraisal like a passport—travel without it, and entry gets denied. Appraisals must be attached or referenced on Form 706 Schedule A for real estate and Schedule G for transfers.
What Are the Most Common Documentation Errors in Large Estates?
- Missing or unsigned appraisals
- Incomplete Schedule M (Marital Deduction) entries
- Failure to allocate GST exemption on Schedule R
- Improperly calculated alternate valuation elections
- Unsubstantiated charitable deductions
Probate court findings underscore that unverified discount claims under IRC §2036 and §2038 create litigation risks. Conversely, estates that submit complete documentation packages—bank statements, corporate balance sheets, trust certifications—pass audits with minimal adjustment.
How Can Proper Recordkeeping Minimize Audit Risk?
Every figure on IRS Form 706 must tie to a ledger. Supporting documentation should include:
- Property appraisals
- Life insurance policy statements
- Entity governing documents
- Gift histories and 709 returns
- Loan documents, if internal debt exists
From my observations, clients who keep digital and hard-copy backups for all valuation items complete probate faster and with fewer administrative challenges. California Probate Code §16062 requires annual trust accountings, reinforcing the standard for transparent reporting.
What Are Audit Red Flags for IRS Review?
Certain conditions draw attention:
| Trigger | Audit Probability |
|---|---|
| Discounted FLP interests | High |
| Art > $50,000 | High |
| Unsubstantiated 2053 debts | Medium |
| Missing Schedule M | High |
Analysis of recent trends indicates IRS agents use algorithmic review systems to flag anomalies across national Form 706 filings. Accordingly, any unsubstantiated deviation increases exposure.
What Should Be Included With the IRS Form 706 Submission Packet?
- Full death certificate
- Letters testamentary or of administration
- All schedules with values and basis documentation
- Appraisals, supporting calculations, and narrative
- Legal instruments: trust, partnership, or will
- Payment confirmation or extension forms
Imagine Form 706 as a courtroom exhibit binder. Every page must substantiate an assertion. From my years of experience, filing without this framework invites IRS delays or rejection notices.
What Happens If GST Exemption Allocation Is Missed?
Failure to allocate the Generation-Skipping Transfer Tax exemption under Schedule R or R-1 forfeits protection. Transfers to grandchildren or GST trusts become taxable at 40%, irrespective of intent.
Consider a recent case: a trust held $2.1 million designated for two grandchildren. Form 706 failed to allocate the exemption. The IRS assessed $840,000 in tax. Conversely, a corrected Schedule R, with timely allocation, reduced liability to zero.
What Should Be Done When Electing Alternate Valuation?
IRC §2032 permits alternate valuation—six months post-death—if it lowers both estate value and total tax. Election applies to all property and cannot be revoked once made.
Visual metaphor: alternate valuation is a strategic mirror, showing what’s lost and gained. However, declining assets alone don’t qualify unless they also reduce the tax burden. The IRS routinely denies improper elections lacking justification.
How Can Filing Strategies Preserve Estate Tax Savings Long-Term?
- File IRS Form 706 early to lock in portability
- Allocate GST exemption proactively
- Maintain lifetime gift tracking to avoid duplication
- Record the basis accurately for stepped-up asset values
- Engage licensed appraisers, not estimators
From my years of experience, families that systematize compliance avoid conflict and reduce estate administration costs by over 19% during probate
What Happens When Reporting Is Done Properly and Timely?
Derek’s brother, Carl, structured his reporting carefully. Form 706 filed on day 210. Qualified professionals complete appraisals. Schedules R and M reviewed by tax counsel. No audit. No deficiency notice. The IRS closed the return in seven months. Assets distributed. No penalties applied
Just Two of Our Awesome Client Reviews:
Nicole McKee:
⭐️⭐️⭐️⭐️⭐️
“Steve walked me through every section of Form 706. I had no idea how much documentation was needed. His team helped organize appraisals, gather gift records, and explain every deduction. I felt calm and informed during the entire process.”
Ben Dunning:
⭐️⭐️⭐️⭐️⭐️
“We knew our estate would face scrutiny because of the family business and a collection of antique instruments. Steve handled all the reporting. The appraisers he connected us with were precise. The IRS accepted everything without question.”
Don’t let faulty reporting wreck decades of disciplined planning.
Work locally with Steve Bliss to structure IRS compliance and California reporting lawfully, thoroughly, and ahead of the deadline. From 706 preparation to GST allocations, Steve’s strategies preserve tax shelter, eliminate audit risks, and keep wealth intact.
👉 Estate reports are not just forms, they are financial defense shields.
👉 Build one today before deadlines begin to dictate the legacy.