IRS Form 706 Schedule C Guide: Mortgages, Notes & Cash

1. Introduction – What is Form 706 (Schedule C)?

IRS Form 706 (Schedule C), officially titled Schedule C – Mortgages, Notes, and Cash, is a mandatory supporting schedule attached to IRS Form 706 (United States Estate Tax Return). Governed by the Internal Revenue Service (IRS), it is used by estate executors to report liquid monetary assets, bank accounts, and debt receivables owned solely by a decedent at death.

Liquid assets and money owed to the decedent represent a significant portion of many gross estates. Schedule C provides an itemized accounting of currency, bank accounts (checking, savings, CDs), promissory notes, land sales contracts, and mortgages where the decedent was acting as the lender.

By disclosing account numbers, financial institution details, remaining principal balances, and accrued interest on Schedule C, executors establish the liquid asset tax base carried over to the main estate tax return.

2. Purpose of the Form

The primary purpose of Schedule C is to ensure that all liquid cash, bank deposits, and debts owed to the decedent are fully accounted for and valued according to federal estate tax rules.

Schedule C solves the critical administrative challenge of distinguishing between money *owed to* the decedent versus money *owed by* the decedent. For example, if a decedent lent money to a family member or held a seller-financed mortgage, that loan is an asset of the estate and must be reported on Schedule C.

Additionally, Schedule C ensures that accrued income—such as uncollected interest on savings accounts or certificates of deposit through the date of death—is captured in the gross estate before assets are distributed to heirs.

3. Who Needs to File This Form

Schedule C must be completed and attached to Form 706 whenever the deceased individual owned cash, sole bank accounts, or debts receivable at the date of death.

An estate executor must list items on Schedule C for any of the following asset types:

• Sole Bank Accounts: Checking accounts, savings accounts, money market accounts, and Certificates of Deposit (CDs) held solely in the decedent’s name.
• Physical Cash and Currency: Currency on hand, physical cash stored in safe deposit boxes, or currency held at the decedent’s residence.
• Promissory Notes Receivable: Personal loans, commercial notes, or private debts owed to the decedent as the creditor.
• Mortgages Owned as Lender: Mortgages or deeds of trust where the decedent was the lender/mortgagee receiving monthly payments.
• Uncashed Checks & Foreign Currency: Dividend checks, refund checks, or pension checks made payable to the decedent prior to death, as well as foreign currency holdings.

4. Who Is Exempt / Not Required to File

Not every financial account or debt is reported on Schedule C. Ownership titles and debt direction determine where items are placed on Form 706.

You should NOT list items on Schedule C in the following situations:

• Joint Bank Accounts: Bank accounts held in Joint Tenancy with Right of Survivorship (JTWROS) are reported on Schedule E (Jointly Owned Property).
• Trust-Held Accounts: Bank accounts or cash held inside a revocable living trust or irrevocable trust are reported on Schedule G (Transfers During Decedent’s Life).
• Mortgages Owed BY the Decedent: Mortgages or debts where the decedent was the borrower (debtor) are liabilities reported on Schedule K (Debts of the Decedent, Mortgages, and Liens).
• Corporate or Treasury Bonds: Government or corporate bonds are reported on Schedule B (Stocks and Bonds).

5. When to File

Schedule C is an integrated supporting schedule attached to Form 706 and shares the exact same filing deadline as the primary return.

Review the primary submission timing deadlines:

• Nine-Month Deadline: Schedule C must be filed attached to Form 706 within 9 months of the decedent’s date of death.
• Filing Extension: If the executor submits Form 4768 to request an automatic 6-month filing extension, Schedule C is filed when the extended Form 706 is submitted (15 months from the date of death).

6. Where and How to File

Schedule C is attached directly behind Schedule B in alphabetical order on Form 706. It is filed by paper mail as part of the complete estate tax return package.

Mail the completed Form 706 return—including Schedule C, date-of-death bank statements, and copies of promissory notes—to the designated IRS submission processing center address specified in the official Form 706 instructions (typically the IRS Center in Kansas City, MO).

7. Step-by-Step Instructions to Fill the Form

Schedule C contains a structured itemized table designed to report bank balances and debt agreements. Review the column breakdown below.

Column Number	Column Header	Information Required to Report
Column 1	Item Number	Sequential numbering for each account, note, or cash entry (1, 2, 3…).
Column 2	Description of Mortgages, Notes, and Cash	Bank name, account type, last 4 digits of account number, debtor name, loan start date, interest rate, and payment terms.
Column 3	Alternate Valuation Date	Enter alternate valuation date if Section 2032 alternate valuation is elected (6 months post-death).
Column 4	Alternate Value	Enter Fair Market Value as of the alternate valuation date (if Section 2032 elected).
Column 5	Value at Date of Death	Enter principal balance plus accrued interest through date of death.

Column 2 – Reporting Bank Accounts and Promissory Notes

Provide complete details for each entry in Column 2:

• Bank Accounts: List the official bank name, account type (e.g., checking, savings, CD), account number (last 4 digits), branch location, principal date-of-death balance, and accrued interest.
• Promissory Notes & Mortgages: State the maker/debtor’s legal name, original date of note, face value, interest rate, payment terms, mortgaged property location, remaining unpaid principal, and accrued interest through the date of death.
• Cash & Uncashed Checks: State physical cash currency amount and list uncashed checks including issuer name and check date.

Column 5 – Valuation Rules

Cash and bank accounts are reported at face value plus accrued interest through the date of death. Promissory notes and mortgages are presumed to be worth the unpaid principal balance plus accrued interest, unless the executor provides written proof that the note is uncollectible or worth less due to debtor insolvency or below-market interest rates.

Total Line

Sum all entries in Column 5 (or Column 4 if alternate valuation is used). Carry this total sum over to **Form 706, Part 5 (Recapitulation), Line 3**.

8. Required Documents/Information Needed Before Filling

Gathering official banking and loan records is essential before completing Schedule C.

Ensure you have the following verification documents ready:

• Date-of-Death Bank Letters: Official date-of-death confirmation letters from financial institutions showing principal balances and accrued interest on the date of death for every sole account.
• Promissory Notes & Deeds of Trust: Certified copies of signed promissory notes, loan agreements, and recorded mortgages/deeds of trust.
• Loan Amortization Schedules: Schedules showing exact remaining principal and accrued interest calculations as of the date of death.
• Evidence of Uncollectibility: Bankruptcy filings, debtor insolvency documentation, or legal opinions if claiming a discounted value on a promissory note.

9. Common Mistakes to Avoid

Errors on Schedule C can cause processing delays or trigger IRS audits. Avoid these common mistakes:

• Reporting Joint Accounts on Schedule C: Listing bank accounts held jointly with survivorship rights on Schedule C instead of Schedule E. Only sole accounts belong on Schedule C.
• Confusing Mortgages Owned vs. Owed: Listing mortgages where the decedent owed money on Schedule C. Mortgages owed by the decedent are liabilities reported on Schedule K.
• Omitting Accrued Bank Interest: Reporting only the principal account balance and omitting interest accrued up to the date of death on savings accounts or CDs.
• Arbitrarily Discounting Promissory Notes: Reducing the value of personal loans owed to the decedent without attaching documentary proof of debtor insolvency or legal unenforceability.
• Failing to Attach Date-of-Death Bank Letters: Submitting Schedule C without official verification letters from financial institutions.

10. Penalties for Non-Filing or Errors

Misrepresenting cash or underreporting notes receivable on Schedule C carries civil penalties under federal tax law.

Key penalty risks include:

• Valuation Understatement Penalty (IRC Section 6662(g)): A 20% penalty applies if the reported note or asset value is 65% or less of the correct Fair Market Value.
• Gross Valuation Understatement Penalty: A 40% penalty applies if the reported asset value is 40% or less of the correct Fair Market Value.
• Audit Adjustments and Interest: Omitted bank accounts or underreported cash trigger IRS field audits, resulting in back taxes, accrued compounding interest, and delayed estate closing letters.

11. Related Forms or Schedules

Schedule C operates alongside several core Form 706 schedules and estate reporting forms:

• Form 706: United States Estate (and Generation-Skipping Transfer) Tax Return.
• Form 706 (Schedule B): Stocks and Bonds.
• Form 706 (Schedule E): Jointly Owned Property (for joint bank accounts).
• Form 706 (Schedule G): Transfers During Decedent’s Life (for trust-held cash).
• Form 706 (Schedule K): Debts of the Decedent, and Mortgages and Liens (for debts owed by decedent).
• Form 8971: Information Regarding Beneficiaries Acquiring Property From a Decedent.

12. Frequently Asked Questions

1. What is IRS Form 706 Schedule C?

IRS Form 706 Schedule C is the supporting schedule used by estate executors to itemize and report all cash, sole bank accounts, promissory notes receivable, and mortgages owned as lender by a decedent at death.

2. What is the difference between a mortgage on Schedule C versus Schedule K?

A mortgage on Schedule C represents money owed *to* the decedent as a lender (an asset). A mortgage on Schedule K represents money owed *by* the decedent to a lender (a debt/liability).

3. Where are joint bank accounts reported on Form 706?

Bank accounts held jointly with right of survivorship are reported on Form 706, Schedule E (Jointly Owned Property), not Schedule C.

4. Do I need to report accrued bank interest on date of death?

Yes. You must report both the principal balance and the interest accrued through the exact date of death for checking accounts, savings accounts, and Certificates of Deposit.

5. Can the reported value of a promissory note on Schedule C be discounted?

Yes, but only if the executor provides clear documentary evidence showing that the note has a lower market value due to below-market interest rates, extended maturity, or debtor insolvency.

6. How is foreign currency reported on Schedule C?

Foreign currency held by the decedent is converted to U.S. dollars using the official commercial foreign exchange rate in effect on the date of death and listed on Schedule C.

13. Conclusion

IRS Form 706 (Schedule C) is an essential component of estate tax compliance for reporting liquid assets and debt receivables. By properly classifying bank accounts, listing promissory notes, and calculating accrued interest, executors ensure full transparency with the IRS.

To avoid audit adjustments, obtain date-of-death valuation letters from banks, distinguish between sole accounts and joint accounts, report mortgages owned as lender correctly, and attach supporting loan documents.