Advanced Underwriting Consultants

Question of the Day – March 28

Ask the Experts!

Here’s the question of the day.

Question: I’ve heard that the IRS determines a value for a closely held business when one of the owners dies.  How does that work?

Answer: The federal government requires an estate tax return to be filed for any decedent with a gross estate at the time of death in excess of $5 million.  The IRS estate tax return is Form 706.  Generally, it is the responsibility of the decedent’s executor to file the form.

 

On the estate tax return, the executor must list every asset that is included in the decedent’s estate for estate tax purposes.  Along with the description of the asset, the executor must also list the fair market value of the asset on the date of death (or the alternate valuation date, if that is used for valuing the estate’s assets).

 

For cash assets and publicly traded securities, value on the date of death is usually easy to calculate, as valuation information is readily available.  However, for an asset such as a closely held business, accurately valuing the asset is harder.  The IRS wants the asset’s fair market value listed, even though two valuation experts might disagree on a business’s value.

 

However, it is the executor’s responsibility to submit a list of assets and their values on the return, and swear to the IRS—by signing the return—that the information is complete and accurate.

 

If the IRS selects a particular return for review or audit, it may ask the executor for the information used in calculating the fair market value of an asset—such as a closely held business interest.  When the IRS thinks the executor didn’t value the asset correctly, it may calculate its own value.  If the amount of tax increases as a result of the IRS calculation, it may assess a tax deficiency.  Any disagreement over valuation that can’t be resolved between the IRS and the estate will likely be decided by a court.

 

If the IRS thinks the executor has undervalued an estate asset in a significant way on the tax return, it may seek civil or criminal penalties against the executor.  Furthermore, substantial undervaluation may result in tax penalties of an extra twenty to forty percent.

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