Gift Tax Returns and Adequate Disclosure

September 2, 2015

Filing a gift tax return may seem like a costly hassle, but it’s important to do it right. A properly prepared gift tax return gets the three-year statute of limitations period running, the significance of which is discussed below.

Statutes of limitations are laws that establish time limits within which the government must act. Until the statute of limitations period expires, the value of a gift that is disclosed on a gift tax return may be challenged by the IRS, and a gift tax return assessed.

However, that statute of limitations period won’t run if a gift is not “adequately disclosed on a gift tax return.”  Additionally, if a gift is not adequately disclosed, the IRS can revalue it at any time, even upon the death of the donor.  Since estate and gift tax is imposed on cumulative lifetime gift and estate transfers, failure to trigger the statute of limitations by inadequately disclosing a gift on a gift tax return can have a compound transfer tax effect.  It might turn a non-taxable estate (under the federal exemption amount, currently $5.43 million) into a taxable estate, because of a revaluation of prior lifetime gifts.

A transfer is deemed to be adequately disclosed on a gift tax return if it is reported in a manner adequate to apprise the IRS of the nature of the gift and the basis for the value as reported.  Adequate disclosure includes:

  • Description of the property
  • Identity of, and relationship between, the donor and donee
  • The trust’s tax ID number (if a trust is involved)
  • Detailed explanation of the method used to value to property

In a recent pronouncement (FFA 20152201F), the IRS indicated that gifts of two partnership interests were not adequately disclosed.  The partnerships consisted primarily of farmland that had been appraised by a certified appraiser.  Even though the appraisal was good to have, it was not adequate by itself: the names of the partnerships on the gift tax return were incorrect; the taxpayer identification number for one of the partnerships was incorrect; and the methodology used to value to the partnership interests was not described.

Since the gifts were not adequately disclosed, the statute of limitations was not triggered, and IRS could assess gift tax based on the reported gifts at any time.

Taxpayers are forewarned to adequately disclose gifts on a gift tax return.

For further information, please contact a member of Aronson’s estate, gift and trust practice: Richard Lee, Michael Yuen, or Emily Nathlich at 301.231.6200.

By Richard Lee and Michael Yuen