Recognizing the need to provide some administrative relief to executors (that is, the person responsible for tax filings) of estates of decedents who died during 2010, the Internal Revenue Service issued Notice 2011-76, which extends by six months the deadline to file and pay estate taxes without showing cause (as long as Form 4768 was filed) and extends until Jan. 17, 2012 the deadline for filing Form 8939 to elect out of the 2010 estate tax and into modified carryover basis rules.
The IRS said it’s reasonable to grant relief because executors of 2010 estates “may not have sufficient time to make an informed decision as to whether or not to make a Section 1022 Election and to complete the required filings.” The IRS cited the time it’s taking to implement last year’s tax legislation, as well as the yet-to-be-issued Form 8939 and related instructions.
New Estate Tax Return Deadline
Provided the executor filed Form 4768 by the original due date of the return, the IRS will automatically grant a six-month extension to file and to pay tax from the original due date of Form 706 (estate and generation-skipping transfer (GST) tax return) or Form 706-NA (for estates of decedents who weren’t U.S. residents and weren’t U.S. citizens). Executors needn’t provide a reason justifying the extension of time to file or pay tax. But executors will need to provide an explanation if they make subsequent requests for extension of time to pay tax.
The extensions of time to file and pay tax apparently are available to all 2010 estates, regardless of whether the decedent died on or before Dec. 16, 2010 (the effective date of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010).
The IRS noted it can’t grant additional extensions of time to file Forms 706 or 706-NA, except in the case of an executor abroad.
And here’s a reminder: The request for an extension of time to file is different from a request for an extension of time to pay. They are two separate items, located in separate parts of Form 4768. Executors generally must estimate the tax and enter that estimate on the form for the extension of time to file request to be valid.
What should executors do about paying an estimate of estate taxes if the decision about whether to elect out of the estate tax hasn’t been made? They can check a box on Form 4768 indicating the “taxes cannot be determined because the size of the gross estate is unascertainable.” The IRS hasn’t said whether an estate could check this box because it hasn’t decided whether to elect out of the estate tax.
Didn’t file Form 4768 on time? You still might be able to get an extension of time to file (but probably not to pay tax). Treas. Regs. Sec. 20.6081-1(c) allows the IRS to grant a late extension request for cause. The IRS hasn’t said whether the reasons it cited for granting the automatic relief might also constitute good cause for filing a late extension request.
While the IRS has waived penalties to file on time and to pay on time (provided Form 4768 was timely filed), interest will run on any unpaid tax. So, it might be best to pay the estimated taxes. The current IRS rate of interest is 3 percent – a rate that’s possibly higher than many executors are earning on cash these days.
Although the penalty waiver applies to both estate tax and the GST tax, only estates owing the estate tax will need the relief. That’s because the GST tax rate for taxable transfers occurring in 2010 was zero.
State Estate Taxes
The IRS-granted relief won’t automatically apply to state taxes. Check with your state taxing authority.
New Deadline for Election Out of Estate Tax
In addition to providing relief on the estate tax front, the IRS also extended the deadline for executors to elect out of the estate tax and into modified carryover basis from Nov. 15, 2010 to Tuesday, Jan. 17, 2011 (Monday is a federal holiday--Martin Luther King Jr.’s birthday). The extra time is necessary because the IRS hasn’t yet published Form 8939 and related instructions. The IRS hasn’t yet indicated when it will do so.
The IRS has said it won’t extend that date further, so Jan. 17, 2012 will be the last day executors can elect out of the estate tax or revoke an election made before Jan. 17, 2012. An amended Form 8939 may be filed by July 17, 2012 (except for the purpose of election out of the estate tax or for revoking such an election), provided the requirements of Treasury Regulations Section 301.9100-2(b) are satisfied.
When the executor files Form 8939 (and it isn’t revoked), the executor makes GST tax exemption allocations and elections on Schedule R or R-1 of Form 8939. That GST tax allocation deadline is the same extended deadline as that for Form 8939--Jan. 17, 2012. Failure to attach the GST schedules to From 8939 will cause automatic allocation of GST exemption rules to apply. The IRS made some taxpayer-friendly changes to how automatic allocation will apply in Notice 2011-66.
The last date for providing a statement to those who acquire property from the decedent informing them of carryover basis is Feb. 17, 2012 (moved from Dec. 15, 2011).
Because filing Form 8939 will affect the basis of property acquired from a decedent, it will also affect the amount of gains reportable for income tax purposes on taxable sales or exchanges of such property. Such sales could appear, for example, on 2010 income tax returns of individuals, trusts or estates. The basis for determining gain or loss might be fair market value at date of death (if the estate tax applies) or it might be carryover basis (if the executor elects out of the estate tax). Executors might not know which system of determining basis applies until they make their election by Jan. 17, and executors aren’t required to inform recipients of the property about the basis until 30 days after that.
The IRS has provided relief here, too. Executors should make a reasonable estimate of basis. If that basis must be adjusted after the final determination of basis is made, the executor should file an amended return. At the top of the return, the executor should write “IRS Notice 2011-76.” The IRS will treat this as reasonable cause for the amendment and won’t charge a penalty.
As with the estate tax, it may be best to assume carryover basis applies to avoid interest on taxes due. Furthermore, state tax authorities have not granted automatic relief.