As many know already, Chris Hesse and myself presented a Farm Tax Update seminar in conjunction with the AICPA Ag Conference in Indianapolis on July 13. This seminar was videotaped and will be rebroadcasted on September 3. If you are interested in viewing the broadcast and getting 8 hours of CPE, here is a link to signing up for the seminar.
A new penalty is now due if you overstate basis of assets sold that were inherited from a taxable estate. If you report too much basis on your tax return, the IRS may impose a 20% penalty based upon the reduction in income tax due to the wrong basis amount. For taxable estates that happen after July 31, 2015, they are now required to report tax basis (cost) information to all beneficiaries that receive the property. This is now your income tax basis for the property when you sell it. If you report a cost basis greater than this amount, you may be subject to the penalty.
For example, assume Jane inherits farmland from her mother. On the mother's estate tax return, the cost basis of the land was shown at $5 million. Jane sells the farmland for $7.5 million five years later and reports a cost basis of $7 million and pays income tax on the $500,000 gain. Her tax return is audited by the IRS and they determine she has an increase in taxable income of $2 million and the increase in tax is $476,000 ($2 million times 20% top capital gains tax rate plus 3.8% net investment income tax). In addition, the IRS will impose a $95,200 penalty on top of the tax. This penalty may be imposed even if Jane simply made a mistake in reporting the wrong cost basis.
As you can see, this penalty can add up very fast. Currently, the cost basis information is only provided if there is a taxable estate. However, this may change in the future and if you are not aware of it and make a mistake, it can be costly.