Inherited Property: U.S. Citizens At Risk of Penalties for underreporting Income Taxes

In July 2015, Congress, who is currently loosening accountability standards for businesses, now requires you and me, the common man and woman US citizens to be burden with additional accountability rules impairing the enjoyment of inherited property.

If you are a common man or woman citizen who inherits property that is to be reported on a death tax return (Form 706 – US Estate Tax Return) you must now be sure that the basis of inherited property matches the value of property reported on the return or should have been reported on the death tax return.  If you do not properly report the basis of inherited property, you will very likely be responsible for devastating underreporting penalties Congress has enacted.

Congress, in Public Law 114-41 (2015), aka “The Surface Transpiration and Veterans Health Care Choice Improvement Act of 2015,” that has nothing to do with death taxes, placed an additional burden upon the common US citizen, that is you and me, to report consistent treatment of inherited property for tax returns filed after July 31, 2015.  The sponsor of the bill is Republican Congressman Bill Shuster of Pennsylvania.

This article attempts to simply explain the complicated gyrations of Congressman Shuster’s law P.L. 114-41 that Congress has burdened the common man and woman. While this article is meant only to inform you of the danger Congress has placed upon you, I advise, if you inherit property that you must report the basis on your income tax return, that you should speak to a competent tax advisor to be sure you do not accidently underreport your property basis and subject yourself to underreporting penalties. Congress created a trap to hurt you and me. Be advised that your tax preparer will likely want to charge you fees for the time to research the issue and then advise you.  P.L. 114-41(2015) has added more complication to our tax system, and cost just to report correct information on your tax return.

Reporting Requirements of Inherited Property

Here is what Congress now requires of the common US citizen to substantiate basis of property reported on an income tax return:

  • The final value of property as determined on the death tax return, or
  • If not reported on the death tax return, the final value as provided under Congress’ Internal Revenue Code Section 6035(a)(2).

That essentially means any person who holds a beneficial or legal interest in property must receive from a responsible party (the person responsible for filing the death tax return) within 30 days after the death tax return is filed or is required to be filed the following:

  1. The basis as determined under IRC 1014(f)(3),
    1. Meaning the IRS does not contest the value within 3 years after filing of the death tax return, or
    2. Value determined by the Tax Court or Federal Court pursuant to a settlement with the IRS, or
  • Value specified by the IRS as accepted by the personal representative of an estate.

Translated, Congressman Shuster and Congress has created a huge bureaucracy that either lasts as long as 3 years, or causes you before the 3 years expires to get a court order from a federal court to obtain confirmation of the basis of inherited property.  What if an heir wants to sell inherited property before the 3-year statute of limitations expires for the IRS to challenge? Well the heir is forced to spend thousands of dollars to obtain a federal court order confirming the basis of the inherited value.

You should contact your Congress person and Senator to tell him/her that you do not appreciate the additional burden and delay placed upon you in reporting information on your individual income tax return.  If you choose not to contact your Congress person / Senator and need assistance in confirming basis of inherited property, please contact us. We are licensed in the US Tax Court and  an applicable Federal District Court to obtain confirmation of the basis of inherited property.

January 21, 2016

Kirk D. Kaplan, Esq., CPA

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