IRS issues Final Form 8971 & Instructions on How To Report the Final Estate Tax Value of a Property Transfered to Beneficiaries

For many years the IRS has had a problem verifying the basis of assets received by an heir from an estate. Within the last three or four years, the IRS has required brokerage houses and banks to supply it with the cost basis so that it could determine that the capital gain or loss on securities was correctly calculated. 

There was no such parallel form within the estate tax forum. Section 1014 of the IRC gives the heirs a basis equal to a value reported on an estate tax return. Later, if an heir sells the inherited property, there is no transitional method for the IRS to verify whether the basis claimed by the taxpayer on his personal tax return is correct.

Now, to rectify this situation, the IRS has created a form 8971 along with the schedule A which requires anyone who must file a form 706 or form 706NA to compel the executor/personal representative/administrator to file this form 8971+ schedule A with the Internal Revenue Service. Each heir/beneficiary is to be supplied with a copy of schedule A to inform him of his basis in the assets inherited from the estate. This filing requirement is limited to estates which must file a 706 or 706NA. The upshot of this is that estate tax returns filed merely to achieve portability are exempt from this filing requirement. 

The Form 8971 is due for all 706/706NA's filed after July 31, 2015. It must be filed by the executor with the IRS office in Cincinnati within 30 days of the filing of the 706. 

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

Conceptually the idea is good but as usual, Congress has not thought through all the potential permutations created by this requirement. In a simple estate with few assets, it should certainly not pose a problem. How about an extremely large estate whose assets are being distributed to numerous heirs, sometimes around the world. It is rare that the administration of a an estate of a substantial volume is completed within 10 months or even 15 months of the date of death. What if there is litigation amongst the heirs as to who gets what? Such litigation can go on for a number of years. I am currently involved in an estate tax matter where the widow and the children of the first marriage have been in prolonged litigation for eight years. Until this litigation is resolved, no one knows who will inherit the US assets of the estate. 

What of heirs outside the United States who receive assets from the estate? The IRS requires such beneficiaries to obtain an SSN by filing form SS – 5.  How many heirs outside the United States who are not US taxpayers will bother or even care about obtaining an SSN?  The instructions also tell us that if at the time the 8971 is due it is not certain who will receive what, we are to list all the assets that each heir might receive on his schedule A and amended later. 

Even more vexatious is imposing this requirement on form 706NA filings. These decedents rarely have a US Social Security number. The first time one learns what this number might be is when they receive correspondence, generally a closing letter, from the IRS. In the interim there is no identification number to put on the 8971. Therefore, trying to track the assets from the estate to the beneficiaries can never be achieved. 

Like I said, conceptually this is a very good idea but I am afraid that the implementation by the tax preparers and the heirs is going to lead to a whole host of new problems which will become readily apparent as the numbers of these forms required to be filed increases over the years. Congress created this mess, let them figure out a way to simplify it or make it implementable.

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Robert S. Blumenfeld  - 

 Estate Tax Counsel

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.