Section 2004 of the “SURFACE TRANSPORTATION ACT OF 2015” implements new reporting or what may otherwise be called “stepped up basis conformity”, for executors to ensure basis of assets inherited by heirs of an estate is in agreement with the value determination for federal estate tax purposes.

Section 6035 of the IRC is the NEW provision that outlines the requirement to provide basis information to persons acquiring property from decedents. Domestic estates filing IRS Form 706 or 706-A, or non-resident estates filing IRS Form 706-NA are affected by the new reporting provisions. Generally filing of these returns is done where taxable estate value exceeds the requirement to file threshold. For domestic estates, the 2015 threshold is $5.43M.

Note that Canadian estates holding U.S. situs property such as U.S. real estate or shares of a U.S. domestic corporation whose value is not below the $60K threshold, are also affected by this new provision as their executors must file IRS Form 706-NA.

Form 8971 is applicable to estate return filings made after July 31, 2015. The 8971 must be filed with the IRS with Schedule A to the beneficiary listed on Schedule A no later than the earlier of 30 days after the required due date of the estate return (including extensions) or within 30 days after the return is filed. Pursuant to Notice 2015-37, the due date for post July 31st filing is no earlier than February 29, 2016.

Late-filing penalties

Failure to file a correct 8971 by the due date or to provide correct Schedules A to beneficiaries will attract penalties pursuant to sections 6721 and 6722 if reasonable cause is not demonstrated.

OTHER PENALTY/ASSESSMENT PROVISIONS

20% Accuracy-related penalty

This new law “stepped-up basis conformity” is there to ensure the value of the estate property that determines basis under new IRS 1014(f) to the recipient for subsequent capital gains.

IRC 6035(c) implements a penalty for “inconsistent reporting” by amending section 6662(b) of the IRC with a potential 20% accuracy -related penalty where the basis of property claimed on a tax return exceeds the basis as determined under new section 1014(f).

Limitations on assessment and collection

An overstatement of basis that is at least 25% will be considered an understatement of gross income resulting in a 6-year limitation on assessments for additional tax.

Section 6501(e)(1)(B) of the IRC is also amended by virtue of Section 2005 of the “SURFACE TRANSPORTATION ACT by adding the following provisions:

6501(e)(1)(B)(ii) -An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income; and

6501(e)(1)(B)(iii) -In determining the amount omitted from gross income (other than in the case of an overstatement of unrecovered cost or other basis), there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item.

The updated Streamlined Program that was revised in June 2014 is a simplified method of allowing delinquent U.S. taxpayers to become tax compliant. If certain conditions are met, tax and information return penalties could be waived. Refer to my article on the website and the IRS site for additional information on the program.

On December 17th at the George Washington University Law conference on international taxation, the Commissioner of the IRS John Koskinen said, “At some point, we will have assumed that people have had enough notice that they should have become voluntarily compliant,” “At that point—after some period of time and you’re not compliant—it will be assumed that logically you are purposely not compliant”.

This announcement is a wake-up call as such amnesty programs do not last forever. Furthermore, with the advent of the sharing of financial information with Treasury under FATCA this year, it appears that it may be only a limited time for delinquent filers not to be discovered.

On December 18th, President Obama, signed H.R. 2029, the tax (the “Protecting Americans from Tax Hikes Act of 2015”) and spending bills (Consolidated Appropriations Act, 2016) to fund the government for its 2016 fiscal year.

The December The Act increases the rate of withholding from dispositions of U.S. real property interests under §1445 from 10% to 15%, but remains at 10% for residences sold for less than $1 million.

The withholding exemption where the sale price is under $300,000US and the purchaser will acquire the property as their principal residence is still in effect.

The increase in the withholding tax rate applicable to sale prices of over $1M should cause those taxpayers with losses or nominal gains to apply for a withholding certificate using IRS Form 8288-B to reduce the withholding to an amount equivalent to their effective tax.

On December 18th, President Obama, signed H.R. 2029, the tax (the “Protecting Americans from Tax Hikes Act of 2015”) and spending bills (Consolidated Appropriations Act, 2016) to fund the government for its 2016 fiscal year.

The Act requires individuals who were issued Individual Taxpayer Identification Numbers (ITINs) before 2013 to renew their ITINs on a staggered schedule between 2017 and 2020 either in person before an IRS employee or a certified acceptance agent or by mail under procedures to be developed. Documentation proving identity, foreign status and residency is required for renewal. The Act also provides that an ITIN will expire if an individual fails to file a tax return for three consecutive years.

Similar rules apply to individuals residing outside the United States such as Canadians who applied for ITINS and file U.S. tax returns reporting their net rental income from U.S. real estate.

Individuals that applied for ITINS to complete specific tax withholding IRS waiver forms such as the W8-BEN may also be affected as those forms are generally only in effect for 3 years and must be resubmitted to the withholding agent. Individuals who are in receipt of U.S. pension or royalties don’t file U.S. returns as generally this type of U.S. source income is not connected with a trade or business situated in the United States. A return would be only be filed to obtain a refund if the actual withholding exceeded the rate that is contained in the Canada/U.S. tax treaty.