Gift Tax Returns and the Statute of Limitations

March 13, 2015

The present interest annual exclusion for gifts is currently $14,000.   That means that cumulative gifts to a donee during the course of a calendar year can be up to $14,000 without any gift tax implications.  Once the $14,000 threshold is exceeded, a federal gift tax return (Form 709) should be filed.  If a gift tax return is not filed, the statute of limitations (which is normally three years) never begins to run and the ability of IRS to assess gift tax is not cut off. 

A case that’s been pending in the Tax Court for almost two years now illustrates how important it is to file a gift tax return.  In that case (Redstone v. Comr., filed April 10, 2013), the taxpayer transferred stock in a family corporation to other family members pursuant to the settlement of a family dispute.  The transfer was a gift, but no gift tax return was filed.  In the Tax Court, the IRS is claiming that $1.1 million in unpaid gift tax is due.  Here’s the kicker – the transfer occurred in 1972.  That’s right, 1972!  The interest on the alleged gift is probably over $1 million by itself.  The problem, of course, is that no gift tax return was filed so the statute of limitations never began to run, and all of the taxpayer’s tax years remain open. 

So what does it take to properly file a gift tax return and ensure that the statute of limitation applies?  It’s all about adequate disclosure according to regulations that were finalized in 1999.  Basically, adequate disclosure means enough information is included on the gift tax return such that the nature of the gift and the basis for value of the gift can be determined.  What information should be included?  The regulations require five basic things:  (1)  a description of the gifted property and any consideration that the done received; (2) the name and the relationship between the donor and the done; (3) if the property transferred is in trust, the trust i.d. number must be listed and a description of the trust terms or a copy of the trust is provided; (4) either a qualified appraisal (for certain gifts) or a description of the method used to determine fair market value of the gifted property; and (5) a statement describing any position taken on the gift tax return that is contrary to the regulations. 

If adequate disclosure hasn’t been made, it’s important to get the gift tax return corrected as soon as possible.  If an amended return is necessary, specific procedures must be followed as set forth in the regulations. 

So, get those gift tax returns filed! 

keywords: federal gift tax, form 709, gift tax, gift tax return

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