Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

On September 13, 2011, the IRS announced that large estates of individuals who died in 2010 will have until early next year to file various required returns and pay any estate taxes due.  In addition, the IRS is providing penalty relief to certain beneficiaries of these estates on their 2010 federal income tax returns.

This relief is designed to give large estates, normally those over $5 million, more time to comply with the tax law changes enacted late last year.  The IRS is providing the following relief:

1. Large estates, opting out of the estate tax, now will have until Tuesday, January 17, 2012, to file Form 8939.  This carryover basis form, required of estates making this choice, was previously due on November 15, 2011.  Because this is a change in the specified due date rather than an extension, no statement or form needs to be filed with the IRS to have this new due date apply.

2. 2010 estates that request an extension of time to file on Form 4768 will have until March 2012 to file their estate tax returns and pay any estate tax due.   Normally, a six-month filing extension is automatically granted to estates filing this form, but extensions of time to pay are granted only for good cause.  As a result, most 2010 estates that timely file Form 4768 will have until Monday, March 19, 2012 to file.   For estates of those dying late in 2010 (after Dec. 16, 2010 and before Jan. 1, 2011), the due date is 15 months after the date of death.  No late-filing or late-payment penalties will be due, though interest still will be charged on any estate tax paid after the original due date.

3. Special penalty relief is provided to many individuals, estates and trusts that already filed a 2010 federal income tax return, or obtained an extension and plan to file by the October 17, 2011 extended due date.  Late-payment and negligence penalty relief applies to persons inheriting property from a decedent dying in 2010, who then sells the property in 2010 but improperly reports gain or loss because they did not know whether the estate made the carryover basis election.  Further details are provided in Notice 2011-76 posted on IRS.gov.

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On September 6, 2011, the Christie Administration announced that the New Jersey Division of Taxation will extend tax payment and filing deadlines for individuals and businesses whose operations were disrupted by Hurricane Irene.  Taxpayers who are not able to make normal deadlines for any tax filings (including estate and inheritance tax returns) that were due on or after August 27, 2011 have been extended until October 31, 2011.  All 21 New Jersey counties have been declared federal disaster areas and would qualify for this relief.

In New York, deadlines for tax returns due on or after August 26, 2011 and before October 31, 2011 have also been postponed until October 31, 2011.  This applies to taxpayers directly affected by the storm in the counties of Albany, Clinton, Delaware, Dutchess, Essex, Greene, Montgomery, Nassau, Orange, Otsego, Rensselaer, Rockland, Saratoga, Schenectady, Schoharie, Sullivan, Suffolk, Ulster, Warren and Westchester. This does not affect New York, Kings, Bronx or Queens Counties.

Also, the Internal Revenue Service is giving affected taxpayers until October 31, 2011 to file most tax returns (including estate, gift or GST tax returns), or to make tax payments that have either an original or extended due date occurring on or after August 27, 2011, and on or before October 31, 2011.

We will keep you apprised of the developments regarding this relief.

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In February 2011 the IRS announced the Offshore Voluntary Disclosure Initiative (OVDI) for taxpayers with undisclosed foreign accounts.  This program was a follow up to a program initiated by the IRS in 2009 on the same topic following civil and criminal cases brought by the Department of Justice against Swiss bank UBS AG seeking the release of information concerning secret accounts maintained by U.S. persons with the Swiss bank.  Approximately 15,000 taxpayers came forward under the 2009 program which required the payment of taxes on omitted income going back to 2003, a 20% penalty on those back taxes and a 20% miscellaneous penalty on the high balance of the undisclosed foreign account between 2003 and 2008. 

Under the 2011 OVDI, subject to limited circumstances where a reduced penalty may apply, the miscellaneous penalty has been increased by 5% to 25% of the high balance and taxpayers must still pay the taxes on omitted income going back to 2003.  The new program expires August 31, 2011, but can be extended by up to 90 days under certain circumstances.

The February 2011 OVDI is similar to the 2009 program with some exceptions including an increase in the penalty from 20% to 25%, and an eight year lookback rather than a six year lookback on back taxes.  Taxpayers who do not come forward face much more severe penalties including a fraud penalty equal to 75% of the back taxes and a miscellaneous penalty equal to 50% of the high balance each year (potentially 300% in the aggregate) as well as possible criminal prosecution.

Guidance issued in June 2011 expands eligibility for a 5% penalty (in lieu of a 25% penalty) and clarifies the procedure for individuals choosing to “opt out” of the OVDI.  Those who "opt out" are subject to a more detailed audit and penalties will be determined following the completion of that exam. Cole Schotz Partner Jeffrey Schechter was recently quoted on this issue in the following article titled, "IRS Guidance on Offshore Asset Disclosure Program Perceived Beneficial to Taxpayers" published by BNA Daily Tax Report, which provides some insight into the new guidance. Also, all of the updated frequently asked questions pertaining to the OVDI can be found here.

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The IRS recently announced a second voluntary disclosure program to encourage US taxpayers to reveal their foreign assets, file tax returns for missing years and otherwise come into compliance with the tax laws.

The IRS had a similar voluntary disclosure program which ended in 2009 and resulted in approximately 15,000 taxpayers entering the program, well more than the IRS anticipated.

“Voluntary disclosure” is a long-term IRS policy that a taxpayer who may have committed a tax crime can disclose and correct past wrongs, and in doing so, avoid criminal prosecution. Correcting past wrongs generally includes filing or amending tax returns for prior years and paying all related taxes, interest and penalties.

The new voluntary disclosure program carries stiffer penalties than the first program, reflecting a policy choice that delinquent taxpayers should not be rewarded for waiting. To enter into the new program, a taxpayer must file complete and accurate original or amended returns, any related information returns, including Form TD F 90-22.1, also known as an “FBAR,” which reports the taxpayer’s foreign bank accounts, cooperate in the voluntary disclosure process, and pay all interest and penalties. Under the new program, taxpayers must pay accuracy related penalties, failure to file and failure to pay penalties (if applicable), and also pay an additional penalty generally equal to 25% of the highest aggregate balance in the foreign bank account during the period covered by the voluntary disclosure.

There is a reduced penalty structure for taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year, and for certain other taxpayers who did not open the account or had minimal contact with it.

The program reflects the IRS’ increasingly aggressive approach to enforcing the tax laws in the international area. The IRS recently opened offices in several other counties, particularly in Asia, as part of these efforts. The agency continues to negotiate mutual assistance agreements with other countries’ tax authorities. Moreover, recent legislation (the Foreign Account Tax Compliance Act or “FATCA”) requires foreign banks to disclose information about account holders with US ties. In short, the US landscape for international taxpayers is changing dramatically. For those not in compliance, it is getting more and more difficult to hide.

The deadline for the program is August 31. If you desire further information about the voluntary disclosure program, please contact us.
 

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The IRS and New Jersey Division of Taxation have extended this year’s tax return filing deadline for residents of 12 New Jersey counties due to the flood emergency in the state.  Residents of these counties now have until May 11, 2010 to file their returns.

See the IRS Press Release on this topic by clicking here.

See the NJ Division of Taxation announcement by clicking here.

The extension applies to residents of Atlantic, Bergen, Cape May, Essex, Gloucester, Mercer, Middlesex, Monmouth, Morris, Passaic, Somerset, and Union counties.

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The IRS recently announced in Revenue Procedure 2009-50 that the gift tax annual exclusion amount available to taxpayers in 2010 will remain unchanged at $13,000. The Tax Reform Act of 1997 tied the then $10,000 gift tax annual exclusion to cost of living adjustments based on increases in the Consumer Price Index. As a result, since 1998, the annual exclusion has increased from $10,000 to $13,000. The annual exclusion permits a taxpayer to gift $13,000 annually to any beneficiary without being required to use his or her $1 million lifetime gift exemption amount.

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Late in 2008, the Worker, Retiree and Employer Recovery Act of 2008 was enacted, which provided for a one-year suspension of the required minimum distribution rules in 2009 due to the economic meltdown. This means that IRA and 401(k) participants and beneficiaries are not required to take minimum distributions in 2009. Unfortunately, the enactment of the law in late 2008 resulted in many participants unknowingly taking their minimum distributions in 2009.

On September 24, 2009, the IRS issued Notice 2009-82 to provide relief for taxpayers who already took minimum distributions in 2009 but now want to take advantage of this one-year suspension rule. Basically, taxpayers now have until November 30, 2009 to rollover their mistaken 2009 minimum distributions without any adverse tax consequences.
 

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The IRS has issued the Applicable Federal Rate (“AFR”) for September, keeping the AFR rate under Code §7520 unchanged from August at 3.4%. What this means is that GRATs are still very attractive estate planning devices for taxpayers. The AFR rate is the interest rate the IRS requires taxpayers to apply to the amount gifted to the GRAT to value the gift at zero. If the gifted assets appreciate at an amount greater than 3.4%, then notwithstanding any valuation discounts attributable to the gifted assets, the appreciation in excess of 3.4% would pass gift tax-free to the GRAT’s beneficiaries. Thus, the lower the AFR rate, the more attractive GRATs are to taxpayers.

In light of proposed legislation in Congress requiring only long term GRATs and limiting valuation discounts, now may be the time to implement a GRAT.
 

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The Internal Revenue Service (IRS) said it will aggressively prosecute people with undisclosed foreign bank accounts.  At the same time, the agency recently announced a program that can help people avoid prosecution and reduce their financial exposure.  David Kohane, a member of the Litigation Department and Jeffrey Schechter, a member of the Tax, Trusts & Estates Department, had an article on the subject published on July 2, 2009 in the "Ask The Experts" column of The Record.  Click here to read the article.

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