New IRS Form 8971: Basis Reporting for Taxable Estates

When an individual dies leaving a gross estate (plus past taxable gifts) that exceeds the federal exclusion amount in the year of death ($5.45 million in 2016), a Form 706 Federal Estate Tax Return must be filed. This has long been the law.

But a new law now imposes an additional filing requirement on these estates — and the burden, complexity and ambiguity stemming from it is causing quite a stir in the trusts and estates community.

On July 31, 2015, Congress passed the “PATH” Act that, among other changes, added new Code Sections 1014(f) and 6035.  The purposes of 1014(f) is to clarify that the basis of property acquired from a decedent may not exceed the value reported on the Form 706, as finally determined for estate tax purposes.  This is commonly referred to as “consistent basis.”

For reporting and enforcement purposes, Congress also added Section 6035 requiring the representative to file an additional basis reporting form with the IRS and to provide a schedule to each beneficiary. The Act requires that this return is due 30 days after the filing of the 706. Naturally, last year the IRS had to extend the due date because it had not yet released forms.

On January 29, 2016, the IRS finally released Form 8971 and Instructions.

As of now, here’s what we know about this new filing requirement:

• Form 8971 must be filed every time a Form 706 is required to be filed, within 30 days after the filing of the 706. Although some commentators believe it’s not entirely clear, it seems that Form 8971 is not required when a 706 is filed for portability election purposes only.
• For all 706’s filed August 2015 through January 2016, the due date is February 29, 2016 (perhaps this will be further extended?).
• The executor (or other representative) must file a complete Form 8971 with the IRS separate from the 706.
• The executor (or other representative) must also prepare and separately serve a Schedule A on every beneficiary.
• Substantial penalties may be assessed for failure to file.

The new filing requirement will add substantial additional cost and complexity for taxable estates. On its face, the form seems simple enough, but as one digs deeper, it’s apparent that the new filing burden is substantial and in some ways not yet entirely clear.

Commentators in the trusts and estates community have raised a myriad of questions and concerns with the newly promulgated form and the filing requirements. Rather than repeat those here, for those interested I recommend reading the following:

• AICPA letter to the IRS (January 29, 2016)
• Form 8971 Filing Unhappiness (Rubin on Tax — February 3, 2016)
• Form 8971 and Instructions Released But Many ??? Remain (Bob Wolf via Wills, Trusts & Estates Prof Blog — February 6, 2016)

Executors and trustees for taxable estates need to be aware of these requirements — now. If you filed a Form 706 in August 2015 or later, this new requirement must be addressed. And beneficiaries of taxable estates need to be aware that these forms will provide basis information that must be used for subsequent reporting purposes.

Stay tuned — it is apparent that this new procedure and form is fluid and may very well be clarified and adjusted over time.

02/11/2016 UPDATE: The IRS has announced — by Notice 2016-19 — an extension of time to file Form 8971 and Schedule A (beneficiaries) from February 29, 2016 to March 31, 2016.