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PDtax
PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 2170
Experience:  32 years tax experience, including four years at a Big 4 firm.
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A clients husband died 3/12/10 with a $1.6million estate,

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A client's husband died 3/12/10 with a $1.6million estate, left to her via marital and family trusts funded upon the husband's death. She asked that I prepare the estate tax returns; because there was no federal estate tax at that time, I prepared only a TN inheritance return (INH301), which was finalized on 12/2/10 and for which a TN DOR closing letter was received 1/3/11. It now appears a Federal #706 Estate return should have been filed under Section 301(a) of the Job Creation Act of 2010, signed into law on 12/17/10. Is a #706 return necessary, given that we want to use Section #1014 basis step up? Since neither the return nor an extension for same was filed, are we subject to penalties, given that the estate is well below the $5million exclusion and no tax will be due? Are there other aspects to this situation of which I should be aware?
Submitted: 2 years ago.
Category: Tax
Expert:  PDtax replied 2 years ago.

PDtax :

Hi from Just Answer. going to use Q & A format for your answer...

PDtax :

Q & A didn't work, so staying with chat format.

PDtax :

It is my practice to file the returns to support the stepup in basis you will want.

PDtax :

You don't have to, as spelled out in the following article: http://wills.about.com/b/2011/09/15/to-file-form-706-form-8939-or-nothing-at-all-the-sequel.htm, in which the author reports decedents who died in 2010 got stepup in basis for their estates without having to file either the 706 or 8939. From the author,"...Now that the time has come for the heirs of 2010 decedents to make their decision, a few things have become clear:
The estate tax is the default rule for 2010 decedents. In other words, if the gross estate of a 2010 decedent is valued under $5 million, then the heirs of the estate do not have to do anything - they will simply receive a full step up in basis of all of their deceased benefactor's assets and will not have to file Form 706 or Form 8939."

Customer:

Okay; I know we will be filing late - are there any particular penalties that are NOT based on tax owed?

PDtax :

http://www.irs.gov/instructions/i706/ch01.html#d0e426 is the link to the IRS 706 instructions, re: penalties:

PDtax :

Penalties
Late filing and late payment. Section 6651 provides for penalties for both late filing and for late payment unless there is reasonable cause for the delay. The law also provides for penalties for willful attempts to evade payment of tax. The late filing penalty will not be imposed if the taxpayer can show that the failure to file a timely return is due to reasonable cause.

Reasonable cause determinations. If you receive a notice about penalties after you file Form 706, send an explanation and we will determine if you meet reasonable cause criteria. Do not attach an explanation when you file Form 706. Explanations attached to the return at the time of filing will not be considered.

Valuation understatement. Section 6662 provides a 20% penalty for the underpayment of estate tax that exceeds $5,000 when the under-
payment is attributable to valuation understatements. A valuation understatement occurs when the value of property reported on Form 706 is 65% or less of the actual value of the property.

This penalty increases to 40% if there is a gross valuation under-
statement. A gross valuation under-
statement occurs if any property on the return is valued at 40% or less of the value determined to be correct.


Penalties also apply to late filing, late payment, and underpayment of GST taxes.
Return preparer. Estate tax return preparers, who prepare any return or claim for refund which reflects an understatement of tax liability due to willful or reckless conduct, are subject to a penalty of $5,000 or 50% of the income derived (or income to be derived), whichever is greater, for the preparation of each such return. See section 6694, the regulations thereunder, and Ann. 2009-15, 2009-11 I.R.B. 687 (available at www.irs.gov/pub/irs-irbs/irb09-11.pdf) for more information.

PDtax :

The late filing penalty would apply, but you may be able to claim a reasonable cause abatement.

Customer:

Sounds fair, straight-forward. The safest bet would be to file the #706 and perhaps seek abatement for any assessed penalty for good and reasonable cause. The easiest bet would be to hang our hats on the cited author who believes an estate under $5million does not have to file and can still claim the step up in basis.

Customer:

If there is nothing else, I will put the decision in the hands of the client and proceed from there. Thanks for your help.

PDtax :

Thanks from Just Answer. Please leave positive feedback so I get credit for assisting you today.

PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 2170
Experience: 32 years tax experience, including four years at a Big 4 firm.
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PDtax
PDtax
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32 years tax experience, including four years at a Big 4 firm.