The IRS has been challenging the use of promissory notes when the transaction lacks economic substance, either because the terms of the deal are too good to be real or the parties ignore the terms altogether, said William I. Sanderson, partner at McGuireWoods LLP. And so those rules could have a significant impact, especially on outstanding transactions, if taken up again.
“It would cause a lot of taxpayers to get religion on how they treat some of these intra-family transactions,” Sanderson said.
The Biden administration could also prioritize rules carrying out a 2015 law provision designed to prevent estate executors from reporting a low property value for estate tax purposes while distributing the same property to beneficiaries with a higher value, or basis, which would reduce their capital gains tax bill when they sell it.
The regulations were proposed (REG-127923-15) in 2016 with strict rules for property omitted from estate tax returns. They stayed on the Trump administration’s priority guidance plan but were never made final.
The regulations, however, address a relatively minor problem for the agency, which may limit their impact, said Hogan, who spent decades working at the IRS on estate and gift tax issues.
More Enforcement
Increasing funding for the IRS so that it can audit more gift and estate tax returns is another avenue for bringing in more revenue from the rich, without having to pass legislation raising tax rates.
Policymakers on Capitol Hill—especially Democratic lawmakers—have expressed interest in increasing the agency’s budget so that it can audit more high-income individuals and corporations.
Ian Weinstock, a partner at Kostelanetz & Fink LLP, said that would be the most-effective strategy. He doubted the agency’s ability to bring back rules, like the unpopular valuation discount rules, because he said it’s unclear if the IRS had the statutory authority to carry out the changes it was proposing.
He noted the IRS already audits a lot of the estate tax returns because the number of those decreased after the Trump administration’s 2017 tax overhaul doubled the amount wealthy individuals can transfer to their heirs without paying estate tax at death. But there’s a lot of room to increase audits on gift tax and fiduciary income tax returns, he said.
“There are clients out there, lots and lots of people out there, who are basically playing an audit lottery,” Weinstock said.
This article was provided by Bloomberg News.