As with your income taxes, Estate Administration Tax (EAT) can be subject to a dreaded audit.
For EAT purposes, only assets that are probated (those that fall under the Will in which an estate certificate is obtained) are required to be reported. That means if a testator has two Wills and only one of them needs to be probated, the other does not need to be reported. Although this is the case, the Ministry of Finance required copies of all wills.
During an audit, the Ministry can require documentation for each asset included in the application for probate. If the assets are extensive, this can be quite the undertaking to provide. Even after this documentation is provided, the Ministry may still request further clarification on certain assets.
While an audit may be unavoidable, an Estate Trustee can take steps to ensure the process goes as smooth as possible. When reporting the assets on the Estate Information Return (EIR), the Estate Trustee should do their due diligence when determining what assets must be included for tax purposes. For assets that are difficult to categorize (such as a contingent interest in property) legal advice should be sought. Once the assets to be reported are identified, the Estate Trustee should ensure they are properly valuated. For assets such as real property or commercial interests, this may mean getting several formal opinions as to their value. This is always a delicate balance in that valuations can be costly, but in the event of an audit the Estate Trustee must be able to defend their valuation.
During the administration of the estate, it is a good idea for Estate Trustees to do an interim distribution, and hold back some of the assets in case the estate is audited and found to owe more taxes. Unfortunately, the Ministry can audit the estate for four years from the date when taxes become payable. For a conservative Estate Trustee who wants to minimize liability, this can mean waiting four years until the administration of the estate is complete.
Audits are never fun, and an Estate Trustee must always be mindful they are a real possibility when administering the estate. It is important to do the work on the front-end, seek the advice needed, and take the time to complete EIR forms properly to minimize the stress of the audit process.