For beneficiaries of inherited property that have been easing their tax burden by reporting inherited assets on their returns at higher amounts than the assets’ original values, the IRS is cracking down on the dishonest practice through recent changes to the law. The updates, part of Congress’ recent highway bill, will apply to executors and beneficiaries of estates with tax returns filed after July 31, 2015.

A new required form alerts beneficiaries and the government of the basis (fair market value at date of death) of inherited assets, so beneficiaries cannot overstate the basis when they go to sell the asset at a later time. The IRS hopes to stress the importance of consistent basis reporting by all parties involved in a deceased person’s gross estate.

More about the dishonest practice

The IRS drafted Form 8971, which includes changes that are expected to bring an additional $1.5 billion to the Treasury over the next 10 years, studies show, but how?

Currently, beneficiaries are able to deceitfully overstate the original value of the inherited property on their income tax returns to ease their tax burden. Through a “step-up in basis” (readjustment of an appreciated asset’s value upon inheritance), there is no income tax due on assets held at death. Appreciation after death, however, is subject to a federal capital gains tax of up to 23.8% upon sale of the asset. Up until now, beneficiaries were able to cheat this law and argue for a different basis, which led to huge tax savings for many wealthy individuals.

New requirements

Under the new laws:

• Executors and other applicable parties will be required to file a statement with the IRS pinpointing each asset included in the gross estate of the decedent.
• Each person with any interest in the property that is part of the decedent’s gross estate must be issued a statement as well.

When will forms be released?

Sample forms are in the works right now, and the Treasury (in an August notice) said the forms will not be due until February 29th, 2016.

A draft is being put together proposing rules regarding:

• Whether an executor has to send out forms for cash bequests
• The extent to which appraisals are needed for specific bequests of assets
• How executors should handle estates where uncertain tax liabilities and debts postpone distributions

Are there penalties for not complying with the new rules?

There are significant potential penalties for those who do not comply with the new rules. This includes a 20% penalty for any beneficiaries failing to pay the value the estate puts on an asset (something executors are required to report to the IRS and inheritors).

Consistency is vital

Through these changes, the IRS hopes to stress the importance of consistent reporting between estate executors and beneficiaries. Without this balance, not only are individuals receiving unfair and unearned tax advantages, but a decedent’s estate is not being respected the way he/she intended.

Questions? Contact any member of our Private Client Services Group.