The IRS has published its official inflation-adjusted tax figures for 2018 for estates and gifts.
Among them are:
- Unified credit against estate tax. For an estate of a decedent dying in calendar year 2018, the basic exclusion amount is $5.6 million, up from $5.49 million for 2017. The generation-skipping transfer (GST) tax is also $5.6 million for 2018.
- Annual exclusion for gifts. The annual gift tax exclusion will increase in 2018 for the first time since 2013 to $15,000. This is up from $14,000 for 2017. It’s adjusted only in $1,000 increments, so the amount doesn’t increase every year.
Keep in mind that, if Congress passes a new tax law, these amounts may change. Both the proposed House and Senate plans would increase the estate tax exclusion significantly above the $5.6 million issued by the IRS for 2018.
TIGTA Tells IRS to Improve Estate and Gift Tax Return Exam Process
The Treasury Inspector General for Tax Administration (TIGTA) in a recent audit said the examination process for estate and gift tax returns needs improvement.
The impetus for the audit, TIGTA said, was that the IRS reported in its Fiscal Year 2016 Data Book that it “proposed more than $1 billion of additional tax for estate and gift tax returns that were examined and closed during Fiscal Year 2016.” TIGTA said its aim was to determine whether the Estate and Gift Tax Program is effectively processing and selecting estate and gift tax returns for examination and to identify the overall compliance impact of the program.
Auditors reviewed the relevant classification, prioritization and inventory assignment processes, and determined that related improvements are needed in Internal Revenue Manual (IRM) guidance, classification sheet documentation and managerial oversight.
“There is minimal IRM guidance” and some classification sheets were found to be either incomplete or close to indecipherable, the audit said. “A single employee prioritizes cases selected for examination during classification sessions and assigns these cases to the field for examination, and a lack of documented managerial reviews over the processes poses risks,” TIGTA noted. In addition, case documentation guidelines were not followed in 18 (or 47%) of 38 randomly sampled estate tax examinations and in 17 (or 46%) of 37 randomly sampled gift tax examinations.
The audit report can be found here.
IRS Withdraws Proposed Regs on Lapsing Rights and Restrictions
The IRS has withdrawn proposed regulations that were issued in August 2016 and that covered the tax treatment of lapsed voting or liquidation rights.
The regs covered restrictions on liquidation of an interest for estate, gift and generation-skipping transfer taxes. The U.S. Tax Code provides that certain non-commercial restrictions on the ability to dispose of or liquidate family-controlled entities should be disregarded in determining the fair market value of an interest in that entity for estate, gift and GST tax purposes. The proposed regs would have created an additional category of restrictions that also would be disregarded in assessing the fair market value of an interest.
The proposed regs would have:
- Narrowed long-standing exceptions and dramatically expanded the class of restrictions that are disregarded, and
- No longer allowed exceptions for interests in active or operating businesses.
The Treasury and the IRS now believe that the proposed regs’ approach to the problem of artificial valuation discounts is unworkable. Commenters warned that the valuation requirements of the proposed regs were unclear and that their effect on traditional valuation discounts was uncertain.
In particular, commenters argued that it wasn’t feasible to value an entity interest as if no restrictions on withdrawal or liquidation existed in either the entity’s governing documents or state law. Commenters also argued that the proposed regs could have produced unrealistic valuations. For example, the lack of a market for interests in family-owned operating businesses is a reality that, commenters argued, should continue to be taken into account when determining fair market value.