Estate taxes are required to be paid from any gross estate exceeding $5.34 million. Many, if not most estates, are not required to pay estate taxes because of Estate Tax Exemption. However, if your estate is not exempt, filing a federal estate tax return will be required. Before the estate is closed by its personal representative, the inheritance taxes must be paid and the IRS must issue a certification that the taxes have been cleared. That certification is known as a tax clearance letter.
What is a Tax Clearance Letter?
A tax clearance letter is the written certification that is issued by the IRS, once the required federal estate tax return has been filed. This clearance letter says that the IRS has accepted your tax returns. An estate cannot be closed in probate until this letter is issued.
If your state imposes an inheritance tax, the state’s revenue or finance department will also issue a tax clearance letter once that tax has been paid. Arkansas is one of many states that no longer imposes an inheritance tax.
Timeline for Receiving an Estate Tax Clearance Letter
The federal estate tax form, IRS Form 706, needs to be filed within nine months of the decedent’s date of death. If an extension is needed, an automatic six-month extension can be requested from the IRS. But remember, the request for extension will not delay the time for paying the taxes that are due. Also, a delay in filing the estate tax return will cause a delay in the amount of time it takes the IRS to process and examine the return once it is filed.
After filing Form 706, it normally takes anywhere from 6 to 8 weeks for the form to be processed and entered into the IRS database. According to the IRS, it takes 4 to 6 months to obtain the clearance letter if the return is accepted without any errors or special circumstances. However, the time is much closer to 6 to 9 months.
Auditing by the IRS can prolong the process
There is also a possibility that the estate tax return will be audited, which will lengthen the time for processing. Unfortunately, if an audit is required, it may take another 4 to 6 months for the audit to be completed and an estate tax clearance letter issued. If the estate is more complicated, the audit can take an additional 6 months to several years.
If you have questions regarding estate taxes, or any other estate planning needs, please contact Sexton, Bailey Attorneys, PA online or by calling us at (479) 443-0062.