Harry Gross: The high cost of understating value

Dear Harry: My father-in-law is in his 80s and is living in a nursing home. We have been going over his resources because his money is fast being used up. He inherited a pretty substantial estate from his mother in 1998. However, there seems to be a huge discrepancy in the value placed on his mother's home at the time of her death. A very large understatement of the value of the home was used on her inheritance-tax report. It had to have been undervalued by at least $400,000, based on sales of a number of similar homes in 1998. When this home was sold two years later, the capital-gains tax was tremendous for both IRS and the state. I know it's a long time ago, and the period open for amended returns is long past, but there has to be some way to recoup this large overpayment. Is there a way to do this? We would deeply appreciate any suggestions.

What Harry says: I know of no way to get either the state or the federal government to extend the open period for amended returns. There was a time when it was popular to undervalue assets for inheritance-tax purposes. However, many heirs then got burned by the new tax basis for the assets at the value used for inheritance tax. If you could open those returns, the inheritance taxes would be increased, but by less than the income tax that would be saved, so your thoughts are on the ball. My guess is that the person who did this did not consider the income-tax consequences. It is too late to do anything.

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