Estate tax returns filed after July 2015 and now required to file Form 8971 with the IRS Service Center in Cincinnati by February 29, 2016.  Schedule A to Form 8971 reports the estate tax value of property passing from an estate or decedent to that beneficiary.  Each beneficiary will receive a separate Schedule A reporting the property received by him or her.  Form 8971 and Schedule A is a reporting requirement that is separate and distinct from the obligation to file an estate tax return.  Form 8971 is not filed as part of the estate tax return.

Notice 2015-57 fixed February 29, 2016 as the due date for all Forms 8971 and all Schedules A, that are  required to be filed with IRS after July 31, 2015 and before February 29, 2016.  Returns filed after that date will require Form 8971 to be filed no later than the earlier 30 days after the date Form 706, Form 706-NA or Form 706-A is filed (including extensions) or, if the first Form 706, Form 706-NA or Form 706-A is filed after the due date and after July 2015, 30 days after filing.

Penalties for failure to timely file Form 8971 with Schedule(s) A are $50 per day with a maximum penalty of $532,000 per year ($186,000 if taxpayer qualifies for lower penalties).  The penalty is $260 per day if filed after 30 days after the due date up to $3,193,000 per year ($1,064,000 if taxpayer qualifies for lower penalties).

In most estates, the distribution has not occurred at the time of filing of the estate tax return so the executor must list all items that could be used, in whole or in part, the fund a beneficiary’s distribution. Many Schedule A will contain duplicate information.

The executor is required to maintain proof of delivery of each beneficiary’s Schedule A in his or her file.  Proof of delivery is not to be confused with proof of mailing. Where the value is adjusted in an audit or in Tax Court, a supplemental Form 8971 and Schedule A, reporting only the changed information, must be filed within 30 days of the adjustment.  The standard due going forward is Form 8971 and Schedule(s) A are due 30 days after the estate tax return.

We know that a beneficiary may sell or depreciate inherited property and the basis of that property is essential for the beneficiary’s income tax treatment.  We suspect IRS is also closing the door on taxpayers who have taken liberties with the basis of inherited property in order to avoid income tax.  What is certain is that penalties will be assessed because estates that must file Form 706 receive little sympathy and the preparers will receive even less.

Do you have any questions regarding the filing of Form 8971? Please contact me, Frank L. Brunetti or attorney James F. McDonough with your questions.