An estate would be audited when something on its Form 706 draws a classifier’s attention: a questionable asset value, an outsized deduction, a missing schedule, or a structure the IRS routinely challenges. Roughly 0.7% of federal estate tax returns are examined, more than triple the rate for individual income tax returns, and the odds climb with the size and complexity of the estate. An audit notice is not an accusation. It means the IRS wants to verify the numbers before the file is closed.
Only estates required to file Form 706 face this risk at all. For deaths in 2026, the basic exclusion amount is $15 million per individual, so smaller estates generally neither owe federal estate tax nor file the return. The exception is portability: a surviving spouse who wants to preserve the deceased spouse’s unused exclusion must file Form 706 even when the estate is well below the threshold. Everything that follows applies to those filings.
How Returns Get Picked
Estate tax returns don’t go through the automated scoring that handles most income tax filings. The IRS uses what its Internal Revenue Manual calls a “combination of methods, including automated processes, historical data, data-driven algorithms, employee technical expertise, and third party information.” In practice, human classifiers in the estate and gift tax unit read returns that meet screening criteria and decide which ones to pull.
A single unusual item can be enough to trigger selection. Returns typically sit at the national service center for up to six months after filing; those not flagged in that window are unlikely to be audited at all. The categories below are what classifiers look for.
Valuation Problems
The value assigned to assets is the most common trigger. Every dollar of undervaluation reduces the tax owed directly, so the IRS treats this as the highest-priority area. The risk is concentrated in assets that lack a public market price.
Hard-to-Value Assets
Closely held businesses, art collections, intellectual property, and undeveloped real estate all require subjective judgment to appraise. The IRS examines whether the appraiser used a defensible methodology and whether the assumptions behind the number hold up. An appraisal built on cherry-picked comparable sales or unrealistic growth projections will draw scrutiny.
To hold up in an audit, the appraisal should come from a qualified appraiser. Under Treasury regulations, that means someone with verifiable education and experience valuing the specific type of property, or someone who holds a recognized appraiser designation. The appraiser cannot be related to the decedent or the beneficiary, and cannot be someone either of them regularly uses. An appraisal from someone outside those requirements is far easier for the IRS to challenge.
Valuation Discounts
Fractional interest discounts and lack-of-marketability discounts are among the most contested items on estate tax returns. These reduce the reported value of an asset because the decedent held only a partial interest or because the asset could not easily be sold. The discounts can be legitimate, but the IRS pushes back when they look inflated or when the underlying entity appears to exist primarily to produce them. Real estate can also prompt a review when the reported value falls well below comparable sales without a clear explanation such as environmental contamination or binding deed restrictions.
Aggressive or Poorly Supported Deductions
Deductions reduce the taxable estate dollar for dollar, so auditors read them closely. Executor fees, attorney fees, and accountant fees are deductible, but they need to be proportionate to the work actually performed. A 4% executor commission on a straightforward estate with liquid assets looks very different from the same percentage on a complex estate with multiple operating businesses. Expect requests for time records and engagement letters.
Debts claimed as deductions must be real obligations the decedent was legally bound to pay. Promissory notes between family members receive extra scrutiny because they can be used to manufacture deductions. Classifiers look for arm’s-length terms, actual payments during the decedent’s lifetime, and documentation that predates any estate planning.
Charitable deductions get flagged when the recipient’s tax-exempt status is questionable or when the bequest structure fails the technical requirements for a deduction. Marital deductions draw attention when the trust holding the surviving spouse’s share has unusual provisions that could disqualify it.
Incomplete or Inconsistent Paperwork
A sloppy return is an easy target. Even if every valuation is defensible and every deduction is legitimate, missing pieces can pull the whole filing into examination.
Math errors in calculating the gross estate, the taxable estate, or the tax itself are caught quickly. Missing attachments are equally obvious. Form 706 requires supporting documents including the decedent’s will, relevant trust agreements, and appraisals for significant assets. Filing without them signals a return that wasn’t carefully prepared.
Inconsistencies with other filings are another red flag. If the decedent’s final income tax return shows interest income from accounts that don’t appear on Form 706, or if prior gift tax returns report transfers that aren’t reconciled on the estate return, the IRS will want an explanation.
Form 8971 Mismatches
Executors who file Form 706 must also file Form 8971 and provide Schedule A to each beneficiary who inherits property. The form reports inherited asset values to both the IRS and the beneficiaries, and beneficiaries cannot claim an initial tax basis higher than the value reported on Schedule A. Form 8971 is due within 30 days of the Form 706 filing deadline or 30 days after the return is actually filed, whichever comes first. Values on Form 8971 that don’t match Form 706, or a missing Form 8971 altogether, create a discrepancy the IRS can trace.
Family Entities and Foreign Assets
Some assets draw attention because of the structures around them rather than the numbers on the page.
Family Limited Partnerships and LLCs
Family limited partnerships and family LLCs are the single most litigated area in estate tax law. The entities can serve legitimate purposes, but the IRS aggressively challenges them when they look built to generate valuation discounts. The classic pattern that draws scrutiny: a decedent transfers assets into a family entity shortly before death, claims a steep discount on the limited partnership interest, and the entity has no meaningful business operations beyond holding investments. The IRS has won numerous cases where courts found such entities lacked economic substance.
Foreign Assets
Assets held outside the United States complicate a return significantly. The executor has to determine what is includible in the gross estate, apply any relevant treaty provisions, account for foreign taxes that may generate credits, and handle currency conversion. The reporting is technical, and errors in this area can extend the audit window well beyond the normal period.
What’s at Stake If the IRS Disagrees
The penalty structure explains why these triggers matter. If the value claimed for any property on the estate tax return is 65% or less of the correct value, the IRS treats it as a substantial estate tax valuation understatement, and the penalty is 20% of the resulting underpayment, as long as that underpayment exceeds $5,000. If the claimed value is 40% or less of the correct value, it becomes a gross valuation misstatement and the penalty doubles to 40%.
These penalties sit on top of the additional tax owed. An executor who reports a business worth $10 million at $4 million faces the tax on the missing $6 million plus a 40% penalty on that underpayment. Interest accrues as well.
How Long the IRS Has to Come After the Estate
The IRS generally has three years from the filing date to assess additional tax. For estate tax returns, the clock starts when Form 706 is filed, not when the decedent died; a return filed before the due date is still treated as filed on the due date for this purpose.
The window stretches to six years if the estate omits items that exceed 25% of the gross estate reported on the return. Overlooking a single large asset or failing to include certain lifetime transfers can push past that threshold. Assets disclosed on the return or in an attached statement in enough detail for the IRS to understand their nature and amount do not count as omissions, even if the reported value turns out to be too low.
There is no time limit at all if the return is fraudulent or if no return is filed. An executor who suspects the decedent held undisclosed assets is better off investigating thoroughly than filing an incomplete return and hoping the three-year clock runs out.