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Estate taxes: Fighting valuation penalties and coming changes

It has been more than six years since Michael Jackson passed away. But through 2017, the IRS and his estate continued to wrangle over the valuation of estate assets. In December, a tax court judge issued an order in favor of the estate.

Who has the burden of production when it comes to estate tax audits? How will the rules surrounding estate taxation change in 2018?

Failure to quantify how assets were undervalued

In 2013, the agency issued a “notice of deficiency” arguing the estate undervalued a Bentley and the image and likeness of the performer. After a February 2017 trial, the IRS sought to provide more evidence.

A December order denied the request finding that the IRS had the burden of production and failed to introduce sufficient evidence to reopen the trial record. It basically reiterates that the party seeking relief from the court generally has the burden to provide documentation. The decision could prevent the government from seeking a penalty assessment on the estate.

The disagreement was significant. According to Bloomberg Buisnessweek, the IRS argued the value of the image and likeness was $434 million. The estate claimed it had been reduced to as little as $2,000 due to the scandals that plagued Jackson's later years.

2018 Changes coming

In 2018, there will be no change in step-up basis rules – these ensure that the cost basis for your heirs is the value of an asset at the time you die rather than what you paid for it.

The big change was to the exemption amounts. The individual exemption amount, the amount you could leave without heirs paying federal tax, was set to be $5.6 million in 2018. Following the tax bill, this amount doubled and each person can leave $11.2 million. Fewer estates will be subject to the 40 percent estate tax, but it was not outright eliminated.

If you face issues related to valuation of assets while administering the estate of a loved one, seek legal counsel. When tax questions arise in the estate planning process, seek advice from a tax attorney as Benjamin Franklin said, “an ounce of prevention is worth a pound of cure.”

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