New Tax Basis Conformity and Estate Information Reporting Rules Now in Effect

The tax law generally changes the income tax basis of property inherited from a deceased person from what the basis was in the hands of the decedent to the fair market value (FMV) of the property as of the date of death.  This provision is generally beneficial in two respects:  1) property generally increases in value over time, so the increase in basis eliminates the inherent capital gain for income tax purposes, and 2) cost records for property owned by the decedent are often unavailable.  Some taxpayers have taken aggressive tax positions in order to reduce their income taxes, arguing that the FMV of the property was actually greater than the FMV used in the decedent’s estate tax return.  Now a new conformity and information reporting requirement has been enacted as part of the temporary highway funding bill signed into law July 31, 2015.

Effective for property inherited for which an estate tax return is filed after July 31, 2015, the income tax basis of property inherited cannot exceed the FMV determined for estate tax purposes.  Congress gave the IRS authority to issue regulations carrying out the conformity requirement for when an estate tax return is not required to be filed.

A new information reporting requirement also begins.  The executor of the estate must report the FMV of the property to both the IRS and to any person acquiring ownership in the property.  The report must be furnished the earlier of:  1) 30 days after the estate tax return due date (including extensions), or 2) 30 days after the filing of the estate tax return.  Any adjustment to the FMV must also be reported within 30 days of the adjustment.  Again, the IRS is empowered to prescribe the information to be reported and how executors must comply when an estate tax return is not required.  A penalty applies to the failure to file the report.  If the person inheriting the property uses a basis greater than the FMV on the report, the person will be subject to an accuracy penalty of 20% of the understated tax.

Update
The IRS issued Notice 2015-57 extending the due date of the information reports until February 29, 2016.  The IRS states that executors should wait until new forms are developed and further information is provided before filing the reports.

Update #2
On February 11, 2016, the IRS issued Notice 2016-19 extending the due date of the information reports until March 31, 2016.  The IRS states the additional one-month delay will give executors time to review the soon to be released proposed regulations before filing Form 8971 with the IRS and providing Schedule A of Form 8971 to the beneficiaries.

Update #3
On March 23, 2016, the IRS issued Notice 2016-27 further extending the due date of the information reports until June 30, 2016.