Jeffrey Cheyne

2010 Estate Tax Repeal: It Is Official – For A While

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On January 1, 2010, the federal estate tax was repealed for one year (2010) unless and until Congress decides to change the law. We don’t know how long the repeal will last, but the fact that the federal estate tax has been repealed for some part of 2010 complicates estate planning for everyone.

Several members of Congress have indicated that these complications will be resolved quickly, but I remain skeptical. Currently, there are four possible outcomes:

  • First, Congress quickly enacts an extension of the 2009 law ($3.5 million exemption and full basis step-up) retroactively. How many times have we seen Congress act quickly when the Democrats and the Republicans are so polarized?
     
  • Second, Congress passes a permanent extension of the 2009 law, but makes it prospective only. This is the bill that was passed in the House, but 60 Senators have to agree. If it is prospective only, gap legislation will also have to be passed to cover the period when repeal was in effect.     
  • Third, Congress enacts a more permanent reform with a higher exemption amount, and it will likely be prospective only. Some senators would like to raise the exemption to $5 million and add some other changes to permanent legislation. Other senators would prefer the next option of the return to the $1 million exemption. At this point neither side has the 60 votes necessary. The longer Congress takes to pass a reform bill, the more likely it will not be retroactive.
  • Fourth, Congress does nothing and the $1 million exemption returns in 2011.  Unfortunately, political and fund raising motives may result in this outcome.

In the meantime, taking advantage of the estate tax and generation skipping tax repeal will be an important planning opportunity for high net-worth individuals and their advisers. Accountants, attorneys and financial advisors will need to learn the details of the new modified carry-over basis rules since they are applicable to all estates. 

This truly is a mess.  Hopefully, Congress will act responsibly to clean it up.

2010 ESTATE TAX REPEAL STILL ON SCHEDULE!

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On December 16, 2009, the Wall Street Journal reported that the Democrats’ attempt to extend the Federal Estate Tax exemption of $3.5 million into 2010 has been blocked by the Republicans. Senator Max Baucus is quoted as saying, “We clearly will work to do this retroactively, so that when the law is changed, it will have retroactive application.” 

The Republicans believe that the repeal should be allowed to take effect as provided under current law, and Senator John Kyl (R, Arizona) stated, “The problem doesn’t have to exist. They’ll just leave the existing law alone and let the rate go to zero, where everyone wants it anyway.”

 Thus, as the law stands today, Federal Estate Tax will be

  • zero in 2010;
  • with certain exceptions the tax basis step-up will be repealed for 2010;
  • The estate tax exemption will return to $1,000,000 in 2011.

It is an interesting and continuing revelation about the extent of the massive gridlock in the current Congress when the Democrats could not even muster enough votes to pass a mere extension of the $3.5 million exemption for the first three months of 2010.

 

It remains to be seen whether or not enough votes can be mustered to make any estate tax changes in 2010. If the Senate could not pass an estate tax bill with a 60 vote majority, I am skeptical that it will get accomplished in 2010. 

ANOTHER STEP TOWARD ESTATE TAX REFORM – PATCH OR PERMANENT?

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Since the passage of the Economic Growth and Tax Relief and Reconciliation Act in 2001, clients and practitioners have been waiting for years for Congress to determine what happens to estate taxes after 2009. The Republicans hoped to completely repeal the estate tax. The Democrats wanted to keep the estate tax but raise the amount that is exempt from estate tax. 

 

On December 3, 2009, the U.S. House of Representatives passed the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 a/k/a HR 4154. (For a copy of HR 4154 click here),  which is their vision for federal estate tax reform. What does HR 4154 do?

  • HR 4154 makes the federal estate tax exemption of $3.5 million permanent, however, there are no inflation adjustments;
  • The zero estate tax for 2010 is repealed;
  • The basis step-up provisions which have traditionally been part of the federal estate tax law have been reinstated for 2010; and 
  • The estate tax rate is made permanent at 45%.

The House vote to approve the bill was 225 to 200. No Republicans supported the bill. Speculation continues that any estate tax reform legislation that occurs within the next few weeks will ultimately apply to 2010 only, and the more permanent issues will be decided next year. The stage now turns to the Senate, and it is expected to pass its own version of estate tax reform.
 

IRS Extends Deadline for Disclosing Hidden Account

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On September 21, 2009, the IRS announced a one-time extension of the special voluntary disclosure program to October 15, 2009.  Until this announcement the program was set to close on September 23, 2009.

Taxpayers who elect to participate in this program and disclose hidden accounts will have to pay taxes, interest and some penalties.  Taxpayers who don’t participate are likelty to face harsher civil penalties and possible criminal prosecution.

Some taxpayers have accounts over which they have signature authority but no financial interest, or a financial interest in a foreign commingled fund.  The deadline for these taxpayers has been extended to June 30, 2010. 

There are two reporting requirements for each year that have to be met.  One is the amended federal income tax return and the other is Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1) which must also be filed.  Unless all foreign bank accounts have a combined value of less than $10,000, this report is an annual requirement in addition to the federal income tax return.

If you have offshore accounts of any kind, you should take this opportunity to review your tax returns for 2003 through 2008 and any reports that you have filed to determine whether or not you are fully compliant. 

The IRS also announced that there would be no further extensions.

Time Running Out To Use IRS Voluntary Disclosure Program

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Recently, UBS announced that it had agreed to release the names of 4,450 of its account holders to the IRS. This is unsettling news for taxpayers with undisclosed foreign accounts. However, the IRS currently has a Voluntary Disclosure Program to encourage tax payers with unreported foreign accounts, unfiled tax returns, under reported income or frivolous tax deductions to participate and avoid further penalties and criminal prosecution. 

  • Taxpayers must apply to the IRS before the IRS contacts the taxpayer. 
  • On August 25, 2009, the IRS announced that UBS account holders would be eligible until the IRS received the information. Apparently, UBS is notifying its account holders before turning the names over. See IRS Voluntary Disclosure: Questions and Answers

This is crunch time!  UBS account holders are not the only taxpayers with unreported foreign accounts who should be concerned. The disclosure program is about to terminate. 

  • Taxpayers have only until September 23, 2009 to participate in the program. 
  • Voluntary disclosure will allow a taxpayer to avoid criminal prosecution and the assessment of significant IRS penalties. A taxpayer will still have to pay the income taxes, accrued interest and some penalties.  
  • Taxpayers only have one opportunity to make a submission, and failure to qualify for the program, depending on the facts, may lead to criminal prosecution.

If you are interested in a confidential discussion with an attorney about this important opportunity, you may call us at 503-226-2966.

Tax Amnesty Program For Oregon Taxpayers – A Cruel Joke

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Recently, the Oregon Legislature passed a tax amnesty program with the hope of raising $16.2 million in additional revenue. (See Revenue Impact of Proposed Legislation (pdf)) The amnesty applies to corporate income and excise tax, personal income tax, inheritance tax, and transit district (self-employment) taxes. Any Oregon taxpayer with any of these underreported taxes or unfiled tax returns for any period prior to January 1, 2008 will be eligible to apply. (For a copy of the bill see SB880-B (pdf))

  • Short time period: The tax amnesty program is only open for 50 days, beginning on October 1, 2009 and closing on November 19, 2009.
  • Minimal Benefit: The only benefits being offered are the waiver of one half of the interest and all penalties. Not much of an incentive.
  • No Taxes Waived: All the taxes due and the reduced interest must either be paid in full within 60 days of the application or be paid under an installment plan on or before May 31, 2011. Failure to complete an installment plan voids the amnesty benefits.
  • Gotcha Penalty: Anyone who is eligible for this program, but fails to apply will be subject to an additional 25% penalty. This penalty can apply to tax adjustments discovered after November 19, 2009. Also any taxpayer who has received a notice of delinquency or notice of assessment from the Oregon Department of Revenue for any year that would be eligible for the amnesty program cannot participate.

This program is a "cruel joke" because:

  • The amnesty program is only open for 50 days.
  • The amnesty offer is minimal. There is no provision to compromise taxes.
  • Anyone who is currently delinquent with Oregon taxes is probably not eligible.
  • An eligible taxpayer who chooses not participate will have an additional 25% penalty added on.
  • If there is a tax adjustment after the amnesty program has closed it is possible that the additional penalty can be assessed even though the tax payer was not aware of additional tax liability during the 50 day election period.

In conclusion it is hard to see that this program will help either the state of Oregon or its taxpayers.

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