Quote:
Originally Posted by Peter_Spaeth
Bob what if -- horrifying I know -- the decedent's estate tax return understates the value of the card, in an effort to avoid or minimize taxes? Is the heir really stuck with that?
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Sorry, I was updating the post to add more info, and to cover what Adam said so that people would understand that what he posted actually referred to the decedent's estate, and not the personal tax return of an heir who was selling inherited property.
The two may be linked in some aspects, such as being sure to showing the same appraised value of the card for FMV and "stepped-up" basis purposes.
As for your specific question, that could be a real problem. If you look at the last section from my previous post, referring to instructions from IRS Form 8949 (the form on which the sale of the card would be reported) it very specifically spells out the potential for a 20% penalty of any underpaid tax the heir may have because he didn't use and report the same tax basis for the card on his return as it was reported on the decedent' estate tax return. The IRS will also tack on interest for any underpaid tax as well.
Unfortunately, the FMV and basis of the card is determined by the decedent's estate and the executor/fiduciary in charge of it, and is considered the de facto accurate figure(s) to then be used by the heirs. If an heir disagrees with the estate's valuation after the fact, the smartest thing to do would probably be to try and go back to and convince the executor/fiduciary to file an amended federal estate tax return (Form 709), and change the FMV of the card to what the heir believes is correct and accurate, assuming it can be supported and proven by an actual appraisal or valuation. That way the heir can file their personal federal income tax return using a "stepped-up" tax basis for the card that now agrees with the decedent's estate tax return.
However, by filing an amended federal estate tax return, depending on the size of the decedent's estate it is possible that could now result in the decedent's estate owing more federal estate tax (plus interest and penalty) instead. And now you have to remember and consider that the maximum federal estate tax rate under current law is at 40%, while for the heir, the maximum federal LTCG tax rate is only 20%. So in looking at keeping as much money in the family and away from the IRS as possible in this case, it may actually be better for the heir to swallow the mistake, and just use what was shown as the FMV on the originally filed decedent's estate tax return as the "stepped-up" tax basis for the card's sale as reported on the heir's personal federal tax return. The heir may only be getting hit with a 20% tax, whereas on the estate return it may cost the family up to 40% on the same card valuation difference.
In any event, it will end up being a PITA for everyone, and probably require the tax accountant(s) to go back through the heir's personal federal tax return and the decedent's federal estate tax return to figure out the actual tax, penalty and interest costs for the different ways to try and fix this, and see which one costs everyone involved the least amount of money. And that includes the potential added cost for the time and effort to file an amended estate tax return for the decedent's estate.
The one thing you absolutely do not want to do though is to have the heir ignore what may have been reported by the decedent's estate to the IRS in regard to the card's FMV for "stepped-up" tax basis purposes. Showing a different value that does not tie back to what was reported on the decedent's estate tax return will likely get both the executor/fiduciary of the estate, and the heir selling the card, a couple of love letters from the IRS with a few questions for both of them as to what the heck is going on. And the tax accountant(s) likely get(s) to charge both sides even more now to handle the IRS' audit inquiries. Sooooo much fun being a CPA/tax accountant!
