NEW IRS FORM 8971 “INFORMATION REGARDING BENEFICIARIES ACQUIRING PROPERTY FROM A DECEDENT”

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.