Procedure of Investigation of Tax Cases of Estates of Deceased Persons

June 30, 1965 REVENUE MEMORANDUM ORDER NO. 29-65 SUBJECT : Procedure of investigation of tax cases of estates of deceased persons TO : All Regional Directors, Chief Revenue Officers and Other Concerned In order to determine the liabilities to all taxes of deceased persons prior to and up to the time of his death, the following procedure of investigation is hereby promulgated for the guidance of all concerned. (1) Examiners assigned to investigate estate and inheritance tax returns are required to thoroughly investigate not only the estate and inheritance tax liabilities, but also the other tax liabilities of the deceased up to the time of death. (2) In the investigation of the estate and inheritance tax liabilities, the report submitted should contain the details of legal and medical fees deducted in the estate and inheritance tax returns showing therein the nature of the payment, to whom paid and the date of payment. (3) The inventory of assets and liabilities submitted with the estate and inheritance tax return should be thoroughly investigated to determine whether there are assets and/or liabilities not reported in the estate and inheritance tax return. From the reports of investigation, an adjusted schedule of assets and liabilities should be prepared which should be made as basis in determining the increases from year to year of the net worth of the taxpayer up to the time of his death. (4) With the adjusted inventory of assets and liabilities, the examiners should work back to the last five (5) years or longer, if circumstances so warrant, and he should prepare a statement of net worth at the end of every year to determine the annual increases up to the time of death. In determining the net worth from year to year, the tax census returns and income tax returns filed should be take into account in order that the preparation of the net worth of the taxpayer from year to year can be consolidated with accuracy and to determine further whether the increases are warranted by the net incomes reported in the income tax returns. The determination of the net worth of the deceased for the years prior to his death should be determined on the basis of a preliminary investigation without any contact whatsoever with the representative, administrator or heir of the taxpayer. What should be availed of are the records of this Office with respect to the tax census and income tax returns and if necessary, the records of the Register of Deeds or of private entities and corporations. No authority to investigate the previous years should be issued by the Regional Director or Chief Revenue Officer on this preliminary investigation. In case, however, the findings in the preliminary investigation show that there is a disparity between the income reported and the net worth of the taxpayer, or if it has been determined that the income as reported would not warrant the acquisition of assets by the taxpayer up to the time of his death, then the examiner should submit a report to his superior with a request that he be given the authority to investigate the income tax liabilities of the taxpayer for prior years. (5) While this is a clear case of fraud and should, therefore, be investigated by the Investigation branch or by the Investigation Division, cases of this nature, however, should be an exception and the investigation of the income tax cases of the deceased should always be referred for investigation to the examiner handling the investigation of the estate and inheritance tax return. (6) In going over the tax census for the years 1957 to 1961, the properties and liabilities listed therein should be scrutinized carefully as it may have an effect in the changes of the net worth of the taxpayer from year to year and up to the time of his death. As an example, the taxpayer may have a piece of property in his 1957 return but is no longer shown in his 1961 tax census return or in the estate and inheritance tax return, if he died prior to 1961. This should be looked into to determine the reasons for the change. If the taxpayer is engaged in business in 1961, as shown in the tax census return but is no longer shown in the estate and inheritance tax return if he died after 1961, the reasons for the elimination should also be looked into and shown in the report. (7) Field audit reports of the estate and inheritance tax return should not be given due course unless the corresponding report on the income tax liability of the taxpayer for the years prior to the death is incorporated therein. cdt Strict compliance of the instructions contained herein is hereby enjoined. (SGD.) BENJAMIN N. TABIOS Acting Commissioner of Internal Revenue