Supplemental Return Computations

Supplemental estate tax returns must be filed to claim new deductions for additional payments of (state) interest on deferred state estate or inheritance tax and any additional state tax payments. These additional deductions reduce the Federal estate tax and the amounts due on the upcoming Federal and state 6166 anniversary dates from what would otherwise be shown in the billing notices.

There are two methods by which this adjustment can be made.

First, the estate can wait to receive the Federal and state billing notices and pay them when received. A supplemental estate tax return, or a claim of Form 843, can then be filed to recompute the amounts due on the anniversary date that just passed to show the overpayment amounts. These overpayment amounts would then be applied against the next anniversary date payments when they come due the following year. This routine would continue through the final deferred payments, after which a final supplemental return or claim would be filed to recompute the final amounts that were due, and the difference would then be refunded. (Section 6403 precludes a refund of any overpayment of a tax payable in installments until after the total tax has been paid.)

Second, about three months before the anniversary date the estate could contact the person at Cincinnati Campus who is maintaining the section 6166 billing account (the name and telephone number of such person is shown on the annual billing notices, as well as on the initial tentative allowance letter that was sent when the 6166 account was first established) to alert them that an "up-front interest deduction computation" will be utilized to reduce the payment due from what would otherwise have been billed by Cincinnati.

[An up-front interest deduction computation is run out through the upcoming anniversary date. All accrued state interest and state tax payments due on the upcoming anniversary date are allowed as deductions in computing the Federal and state amounts payable on the upcoming anniversary date. Meanwhile, the amounts payable in the official billing notices about to be mailed will be based on such deductions computed only through the previous year's anniversary date. The up-front deduction anniversary date payment amounts will therefore be less than the payment amounts that are about to be billed. Unless Cincinnati Campus is alerted in advance, it will consider the gap in payment to constitute an underpayment as defined in section 6166(g)(3), which will start the 6-month clock running toward termination of the section 6166 election and acceleration of the entire unpaid balance of tax and interest.]

Accordingly, Supplemental Return Computations can be used to run numbers out through the most recent anniversary date or through the upcoming anniversary date

Note: Supplemental returns showing decreases in tax will not be acted upon by the IRS if the original return examination has not been completed. They will simply be forwarded to the examining attorney to be considered as part of the overall examination. See B. Shapiro Estate, 111 F. 3rd 1010, Affirming an unpublished Tax Court opinion; CA-2 1997-1 USTC ¶60,267. If a supplemental return shows an increase in tax, however, the tax increase will immediately be assessed to protect the government's interests.

Note further: The IRS is not obligated to accept up-front state interest deduction computations that are filed in response to the annual 6166 billing notice, but has occasionally done so as a matter of grace. The IRS is also not required to run up-front interest deduction computations through an upcoming anniversary date for the taxpayer, although it has also occasionally done in so as a matter of grace. Thus, there is no guarantee that the IRS will entertain a request to permit an up-front interest deduction computation for a current payment of interest on state estate tax. (Cincinnati Campus has not received any such requests for some time, now.)