Tag Archive for Form 706

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 Read more

US Citizens Living Abroad Are Required To File A US Estate Tax Form

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American citizens are subject to U.S. estate taxation with respect to their worldwide assets. An estate tax return, Form 706, United States Estate (and Generation-Skipping) Tax Return, Estate of a citizen or resident of the United States, is required for a deceased American citizen, if the fair market value at death of the decedent’s worldwide assets exceeds the “unified credit exemption” amount in effect on the date of death. However, if the U.S. citizen made substantial lifetime gifts, and used the applicable “unified credit exemption” amount to eliminate or reduce any gift tax on the lifetime gifts, a U.S. estate tax return may still be required even if the value of the decedent’s worldwide assets is less than the “unified credit exemption” amount at the date of death (due to the decrease in the “unified credit exemption” for the lifetime gifts). To determine the “unified credit exemption” amount for American citizens Read more

To File Or Not To File Form 706?

Taking a closer look at tax laws

In our Estate Tax Counsel’s 32 year career as a senior attorney at IRS International Estate Tax, perhaps the greatest bone of contention, certainly the hardest fought issue, was over domicile, whether to file a Form 706 or a Form 706 NA.  The stakes in terms of tax dollars often was in the millions of dollars. The estate of a US citizen or domiciliary is subject to FET on a world-wide basis  while nonresident aliens estates are subject to tax on assets with a “situs” in the US pursuant to section 2104 of the IRC.

There is no dispute about the fact that if a decedent is a US citizen dying with an estate of over $5.4 million, a 706 needs to be filed. What about US residents? If the resident is not a citizen, it may well raise the issue of which tax return is correct. Most attorneys and accountants deal with income tax, not estate tax. There is a sharp dichotomy between the Read more

Start 2015 Tax Planning Now! Part 3

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Tax Code Changes Create Challenges

Inheritance taxes and estate planning are a growing concern for affluent baby boomers. What are some of the major issues?

In addition to the double step-up in basis on community property discussed above, the baby boom generation will benefit from some of the most generous estate tax loopholes in history. For example, married couples have complete spousal exemption from estate and gift tax when transferring property to each other. This has not always been the case.

For 2015, every person has a lifetime net gift and estate tax exemption up to $5.43 million. Considering that the top gift and estate tax rate is 40%, this exemption represents an Read more

Incorrect Expert Advice About Estate Return Filing Deadline Does Not Excuse Penalty

An executor of an estate who relied on his accountant’s mistaken advice that he had obtained a one-year extension of the filing due date for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, was nonetheless liable for a large late-filing penalty [Knappe, No. 10-56904 (9th Cir. 4/4/13)].

Knappe’s accountant believed the estate tax extension form (Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes), which is used to request both an extension to file and an extension to pay, permitted a one-year filing extension and a one-year payment extension, whereas it actually permits a one-year extension to pay the tax and only a six-month filing extension (unless the executor is out of the country).

When the IRS approved the extension request on January 11, 2007, the IRS agent hand-wrote on the Form 4768 “2/28/07” next to the box that the accountant had checked to apply for the filing extension and wrote on another form that the payment extension was until “8/30/2007 only.” Neither the executor not his accountant realized their mistake, so they filed the return on May 29, 2007, both thinking the due date was August 30, 2007. The IRS assessed penalties for late filing, which, since the estate tax was $1.1 million, were significant (the penalty and interest amounted to $185,626.71 by the time the case reached the appeals court).

The executor argued that he had reasonable cause for the late filing because it was reasonable for him to rely on his accountant’s expert advice. By relying on this advice, he had “exercised ordinary business care and prudence.” He also argued that whether his actions were reasonable was a factual issue that could not be determined on summary judgment.

The Ninth Circuit, however, in its decision affirming the District Court (No. 2:09-cv-07328-DMG-PJW (C.D. Cal. 10/22/10)), upheld the government’s request for summary judgment that the late-filing penalty applied as a matter of law. Quoting the Supreme Court, this court explained that “[w]hether the elements that constitute ‘reasonable cause’ are present in a given situation is a question of fact, but what elements must be present to constitute ‘reasonable cause’ is a question of law” (quoting Boyle, 469 U.S. 241, 249 n.8 (1985) (emphases in original)).

The Court explained that there is a distinction between cases in which a taxpayer relies on the erroneous advice of an expert about when a return is due and cases in which a taxpayer relies on an expert’s erroneous advice about whether a return is due. Because the latter requires advice on a matter of law, it is reasonable for a taxpayer to rely on an expert in that situation. In the other situation, it is not reasonable for a taxpayer to fail to ascertain when a return is due and rely instead on an expert’s opinion.

Therefore, the Court will distinguish between substantive issues and nonsubstantive issues in determining whether taxpayers may rely on expert advice about filing deadlines.  The Court acknowledged that its holding imposes a heavy burden on executors, who have to ensure that they are receiving the correct advice. Nonetheless, the government’s interest in timely filed returns justifies this burden. A further rationale behind imposing the duty to ensure the advice on filing deadlines they receive is correct is that holding otherwise would encourage collusion between taxpayers and their expert advisers because the advisers would have nothing to lose by lying about the advice they gave taxpayers to avoid any further liability.

by Sally P. Schreiber, J. D. Journal of Accountancy, senior editor – April 8, 2013

Edited and posted by Harold Goedde CPA, CMA, Ph.D.