An old saying goes “the third time is the charm.” I guess for Congress, we can say the 35th time is the charm.
Last summer Congress passed its 34th short-term transportation extension bill since 2009, more formally known as The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (HR 3236). President Obama signed the bill into law in July. It was set to expire in November and was extended for two additional weeks before a true long-term highway bill was signed on December 4.
For now, however, I want to go back and focus on the contents of that 34th short-term bill to ensure some important permanent tax changes do not go overlooked now that Congress has moved on. Most of these changes take effect for the 2016 tax year, so taxpayers still have some time to adjust.
The new law changes various filing due dates for certain tax returns. Partnership tax returns will now be due on March 15, one month earlier than under the old law. For partnerships that operate on a fiscal year, the return will be due on the 15th day of the third month following the close of their tax year. C corporation tax returns got moved back one month, to an April 15 deadline. S corporations, which are truly more like partnerships for tax purposes, will keep their existing March 15 deadline. All of these entities will eventually be able to request a six-month extension if necessary, a change from the five months formerly available. Corporations, however, will not have access to this extra month until 2026.
The new partnership filing deadline reflects a logical change, since many individuals cannot complete their personal returns until a partnership’s return is done and the partnership is able to report the owner’s share of pass-through income. The American Institute of Certified Public Accounts (AICPA) and several state CPA societies have advocated such changes for several years.
While these organizations are right that the new deadline is logical in theory, it is far from certain the new deadline will substantially reduce the number of extensions in reality. If anything, the new partnership deadline may actually increase the number of extensions overall, since tax practitioners may be unable to file more returns with a deadline one month sooner. Once the return is extended, any sense of urgency is gone, and the earlier deadline’s benefit along with it.
The other major deadline change pertains to the FinCEN Report 114, more commonly known as the FBAR, which is the form for reporting foreign bank and financial accounts. The requirement to report foreign accounts has moved up from June 30 to April 15, to align with the better-known due date for individual tax returns. And, as is allowed for individual tax returns, taxpayers can now request a six-month extension to file the FinCEN Report 114, which formerly was not an option.
Form 3520, which reports transactions with foreign trusts and receipt of certain foreign gifts, is now also due on April 15. Like the FBAR, Form 3520 now offers taxpayers the option of a maximum six-month extension.
While the ability to request an FBAR extension is a nice change, the new due date could be a trap for self-preparers or other taxpayers who miss this change and file in late June as usual. The law does provide penalty relief for first-time filers who file late by mistake, but nothing for repeat filers who miss the new deadline and forget to file an extension. The Treasury may eventually issue regulations addressing this issue, but for now, taxpayers beware.
Income tax returns for estates and trusts will now have two weeks more when they file for an extension, bringing the period to five and a half months total. This makes the new extended due date September 30 for calendar year filers.
New Basis Reporting Rules for Executors
The new law also introduced provisions regarding the reporting of cost basis for inherited property. The law requires executors of estates that are required to file federal estate tax returns to provide an informational return, filed with both the Internal Revenue Service and each of the beneficiaries, in order to make sure the beneficiaries who inherit property report its cost basis correctly.
Generally, when a beneficiary inherits property the cost basis is reset to the fair market value as of the decedent’s date of death. For individuals who die with low-basis assets, this is a significant benefit. Since the low basis gets “stepped up” at death, beneficiaries pay less capital gains tax when they later sell the assets, or even avoid tax altogether. The IRS viewed this as a problem because there were no formal reporting requirements specific to cost basis, and thus beneficiaries did not always get accurate basis information when they inherit property. The IRS worried that beneficiaries were using incorrect – presumably higher – basis when they eventually sold the property.
While well-intentioned, however, this new law leaves many open questions and creates a variety of problems.
The law states that the new form will be due no later than thirty days after the estate’s tax return is filed or thirty days after the return was due (including extensions), whichever is earlier. The law initially applied to all returns required to be filed after July 31, 2015, but Notice 2015-57 (released on August 21, 2015) delayed the due date for any statement required to be filed with the IRS or provided to a beneficiary until February 29, 2016. It’s a good thing the leap year gave us that one extra day in February.
In December 2015, the IRS issued a draft Form 8971 for executors to use to report the basis under this new law. Based on the draft, the new form will require the estate’s executor to list the beneficiaries’ names, tax identification numbers and addresses. This part of the form is filed with the IRS, but not shared with the beneficiaries. The executor will also complete a separate schedule and provide copies to each beneficiary and the IRS. This new Schedule A requires the executor to describe the property, note whether it increased estate tax, and provide the valuation date and the value.
However, thirty days after the filing of the estate tax return is too soon to tell the beneficiaries what assets they will receive. In many cases the assets held as of a decedent’s death are sold during the administration of the estate, and often even after the estate tax return is filed. Thus the assets and basis reported on the estate tax return, and the new Form 8971 filed 30 days later, may not be the same as the assets the beneficiaries ultimately receive. This could easily create more confusion for both executors and beneficiaries.
The IRS could also challenge the value reported on the estate tax return for up to three years later, within the statute of limitations, forcing the executor to file an updated basis reporting form in order to report the final value as agreed upon. But what if the beneficiary already sold that asset and used the basis as originally provided? The IRS has not released the final version of the form, nor provided formal instructions. So taxpayers continue to wait for more guidance, with time running out before the February 29 deadline. It will not be surprising if the IRS extends this deadline again.
Besides the issue of exactly how to report the information on the new Form 8971, executors cannot be sure which estates are truly required to file in the first place. The new law states that all executors who are required to file an estate return are also required to file the new basis reporting form. The key word here is “required.” With the federal estate tax exemption up to $5.45 million per person for 2016, few estates are truly required to file a federal estate tax return.
However, many executors voluntarily file returns solely for the benefit of electing what is known as “portability.” Portability allows a surviving spouse to benefit from the deceased spouse’s unused estate tax exemption. Under current conditions, the surviving spouse could secure a total estate tax exemption of $10.9 million, comprised of her own $5.45 million exemption and that of her deceased partner. Assuming an executor files an estate tax return solely to elect portability and a return would not be otherwise required by the law, one could conclude the new Form 8971 basis reporting is also not required. Yet in practice, this is unclear. Taxpayers continue to wait for guidance from the Treasury on this issue, too, as the February deadline looms.
In the face of new deadlines and reporting requirements, it is nice to know that some things never change: for instance, the well-known April 15 deadline for individual income tax returns. Actually, hold that thought. For tax year 2015, that deadline is April 18, 2016, since the 15th falls on the Friday during which the District of Columbia celebrates Emancipation Day. In Maine and Massachusetts the deadline is pushed one day further, to April 19, due to the observation of Patriots’ Day in those states.
The good news is that we finally got a long-term highway funding bill. As far as the tax changes, we are still waiting to see how it goes. Happy tax season.