Filing Form 706-NA to secure an IRS Transfer Certificate Form 5173
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When a non-US Person passes with US situs financial assets, it often creates issues for descendants.
1. They are unable to access the accounts until they have an IRS Transfer Certificate.
2. They cannot get an IRS Transfer Certificate until they have a closing letter.
3. They cannot get a closing letter until they file the Form 706 NA
Let's go through this step by step
The purpose of Form 706-NA
Internal Revenue Code (IRC) § 2101 imposes a transfer tax on the estate of any non-resident, non-citizen, of the U.S. Form 706-NA, United States Estate (and Generation Skipping Transfer) Tax Return, is used to compute estate- and generation-skipping transfer (GST) tax liability for all non-resident alien decedents. Form 706-NA must be filed within nine months of the date of the decedent’s death. The taxpayer can request an automatic six-month extension by filing Form 4768 by the original due date. If Form 706-NA is not promptly filed, or the tax payment is not remitted by the original due date, penalties will be levied against the estate.
Who must file Form 706-NA
Form 706-NA applies only to non-resident alien decedents – individuals whom, upon their death, are not U.S. residents or citizens. For purposes of determining estate and gift tax, residency is not determined by the residency rules for income-tax purposes (Sec. 7701(b)(6)). For estate and gift-tax purposes, U.S. residency requires physical presence at some place in the U.S., and the intention to make that place a fixed and permanent home (Christina de Bourbon Patino, 51-1 USTC ¶9123 (4th Cir.), aff’g, 13 T.C. 816 (1949)). If the facts and circumstances support the preceding notion of residence, the executor of the decedent’s estate must file Form 706.
The executor of a non-resident alien decedent’s estate must file Form 706-NA if the date-of-death value of the gross estate located in the U.S. exceeds the filing limit of $60,000.
Determining the taxable estate
Gross estates of non-resident aliens with property located in the U.S., and valued at $60,000
or more, might be subject to estate tax. This is before taking into account any
“allowable deductions” or estate-tax treaties between the U.S. and the non-resident alien’s home country. The value of the decedent’s gross assets is determined at the date of the decedent’s death or, six months later, on the alternate valuation date.
Property located in the U.S., allowable deductions and credits
For real estate and tangible personal property, “located in the U.S.” is determined by physical presence in the U.S. (regardless of where the owner resides). If a non-resident alien buys stock in a U.S. corporation (e.g., General Electric), the stock is considered located in the U.S., regardless of where the stock certificates are held. Furthermore, any debt obligations that a U.S. citizen, corporation or governmental agency issues to a non-resident alien are treated as gross assets, which need to be included within the decedent’s gross estate.
From their gross assets, the decedent’s estate is entitled to deduct any and all “allowable deductions.” These include charitable contributions to U.S. charities designated as such by the IRC. The decedent’s estate also is entitled to certain expenses, losses, indebtedness or taxes incurred by the estate. These expenses must be prorated by the U.S.-share of the decedent’s worldwide estate. Assuming the decedent is not married to a U.S. resident, one deduction that is not allowed to a non-resident alien is the marital deduction, unless it meets the provisions of a Qualified Domestic Trust (Sec. 2056).
Non-resident aliens are entitled to a unified credit of $13,000, reduced by any lifetime gifts. Non-resident decedents whose gross assets are less than $60,000 upon their death may still have to file a Form 706-NA, if they have used any part of the $13,000 unified credit during their lifetime.
Treaty versus non-treaty countries
When determining a non-resident decedent’s tax liability, the estate must take into account whether the decedent resided in a country governed by an estate-tax treaty with the U.S. If the non-resident alien is from a treaty-based country, he or she must attach a statement to Form 706-NA indicating the return was prepared based on a treaty with the U.S. (Reg. Sec. 301.6114-1). Non-treaty based estate tax
returns (i.e., Form 706-NA) are governed by the estate-tax provisions for non-resident aliens in IRC § 2101-2108.
So once the Form 706-NA is submitted within 9 months of the passing, it takes a while to be processed. Sometimes 6 months or more.
We have had issues where the estate tax check is cashed by the IRS but the funds are posted to some sort of suspense account as opposed to being matched to the correct taxpayer account. We then need to contact the IRS international line on 267-941-1000 where we are given another number such as +18593203456. On this second number, callers are invited to leave a message on the voice mail as the mailbox is cleared daily. However, there are times when the mailbox is unavailable. So we need to send an email to the IRS to ensure that the check is matched to the correct return - sbse.eg.intl (at) irs.gov
If everything goes well, the IRS may issue a letter explaining that it was processed. Sometimes it may not send any letter so one would need to contact them accordingly. If they send a letter, they may issue a temporary tax ID to use when communicating with them
Then the next step is to contact the IRS to request a Transfer Certificate. Here's the process for requesting the Transfer Certificate is as follows - https://www.irs.gov/businesses/small-businesses-self-employed/transfer-certificate-filing-requirements-for-the-estates-of-nonresidents-not-citizens-of-the-united-states
Estates and their authorized representatives may request an account transcript by filing Form 4506-T, Request for Transcript of Tax Return. Currently, Form 4506-T can be filed with IRS via mail or facsimile (per the instructions on the form). Although account transcripts for estate tax returns are not currently available through IRS's online Transcript Delivery System (TDS), the IRS website, www.irs.gov, will have current information should an automated method become operational.
To allow time for processing the estate tax return, requests should be made no earlier than four months after filing the estate tax return.
The IRS says that estates and their authorized representatives who wish to continue to receive estate tax closing letters may call IRS at (866) 699-4083 to request an estate tax closing letter no earlier than four months after the filing of the estate tax return.
Instead of securing a closing letter to send with the request for a transfer certificate, it is now possible to send a transcript - https://www.irs.gov/businesses/small-businesses-self-employed/transcripts-in-lieu-of-estate-tax-closing-letters
This is all a very complex and time-consuming process. Do get professional advice