On Jan. 29, 2015, the Internal Revenue Service released the much-anticipated final version of Form 8971, “Information Regarding Beneficiaries Acquiring Property From a Decedent,” and its instructions, exactly one month ahead of the Feb. 29, 2016 filing due date. However, there are still some outstanding issues concerning the form that need to be resolved.
Under the “Highway Bill” (Surface Transportation and Veterans Health Care Choice Improvement Act of 2015), which was signed into law in the summer of 2015, beneficiaries of estates are now required to use the finally determined estate tax value of any property they receive as their income tax basis. The law also imposes a reporting obligation on executors, requiring them to provide such values both to the IRS and the beneficiaries. The law initially applied to all returns required to be filed after July 31, 2015, but Notice 2015-57 (Aug. 21, 2015) delayed the due date for any statement required to be filed with the IRS or provided to a beneficiary prior to Feb. 29, 2016, until Feb. 29, 2016.
The final form is virtually identical to the previously released draft version. The first page of Form 8971 requires the executor of the estate to list the names of the beneficiaries, their Social Security numbers or tax identification numbers and addresses. This part of the form is filed with the IRS (but not shared with the beneficiaries). Next, the executor completes a Schedule A for each beneficiary and provides it to him. Schedule A requires the executor to describe the property, indicate whether it increased estate tax and give the valuation date and value. Note that while only Schedule A of the form must be provided to the beneficiaries, the form must be filed in its entirety with the IRS (including all attached Schedule(s) A). Such filing must be separate from any and all other tax returns filed by the estate. Any form filed with missing entries in any field won’t be processed.
In the event any information reported on Form 8971 and the Schedule(s) A filed with the IRS or provided to a beneficiary differs from the final value (for example, as the result of the resolution of a valuation dispute), the executor must file a supplemental Form 8971 and affected Schedule(s) A with the IRS as well as provide an updated supplemental Schedule A to each affected beneficiary no later than 30 days after the adjustment.
Executors who intentionally disregard filing requirements or fail to file correct Forms 8971 or furnish correct Schedules A to beneficiaries by the due date (absent a showing of reasonable cause) may be subject to a penalty. The amount of the penalty depends on when the correct Form 8971 is filed. Beneficiaries who report basis in property that’s inconsistent with the amount on the Schedule A may also be liable for a accuracy-related penalty equal to 20 percent of the underpayment (under Internal Revenue Code Section 6662).
The form must be filed within 30 days after the estate tax return is filed. According to David A. Handler, this requirement may become unduly burdensome because it’s typically not yet known which assets will be distributed to which beneficiaries at that point in time. As a result, a form must be filed identifying the assets that “could” be used to satisfy each beneficiary’s share, and the above mentioned supplementary form must later be filed identifying the actual assets distributed. Another potential issue he found worth mentioning stems from having to provide the beneficiary a copy of Schedule A. Doing so might give a beneficiary receiving a specific bequest (for example, $100,000) information about all the other assets in the estate, which probably wasn’t intended.
The American Institute of CPAs also sent a letter to the IRS listing eight other recommended changes, including allowing the processing of the form in situations in which there’s a reasonable explanation for “unknown” or missing information (for example, if the search for heirs isn’t complete by the date Form 706 is filed). Due to the problematic nature of the form, perhaps the IRS will be pressed to release version 2.0 in the near future.