The Importance of Filing Gift Tax Returns

The Importance of Filing Gift Tax Returns

The importance of filing gift tax returns—and sufficiently reporting the gifts that should appear on a gift tax return—is often lost on clients who commit substantial assets and professional fees to lifetime transactions with the purpose of minimizing the estate tax burdens for their beneficiaries.

Purpose of Annual Gift Tax Return

Generally speaking, the purpose of filing an annual gift tax return (Form 709) is to account to the IRS for the cumulative use of the taxpayer’s lifetime exemption from the gift and estate tax (in 2023, $12.92 million) by making taxable gifts, and to the extent that the taxpayer’s lifetime gifts exceed their lifetime exemption, to determine the gift tax liability.  The federal gift tax and estate tax are unified, and as such, the determination of the estate tax on death effectively becomes the final accounting because it is based not only on the size of the taxable estate but on all prior lifetime taxable gifts that were made.  As such, all prior gift tax returns that were filed, or required to be filed, by the decedent must be included with the estate tax return (Form 706), and the IRS can always make an assessment or determination with respect to any gift that was made in a prior calendar year for which no gift tax return was ever filed.  So failing to file the necessary gift tax returns during the taxpayer’s lifetime only shifts the reporting obligations to the taxpayer’s executor under circumstances that tend to make it much more difficult to substantiate the nature of intrafamily transfers and the value of gifted property.

Adequate Disclosure and Limitations Period

That said, it is not enough to simply file a gift tax return.  Under tax law changes that took effect in 1997, if a gift is not “adequately disclosed” on the return, then the three-year limitations period that would otherwise apply to prevent the IRS from challenging the nature or the amount of the gift will not run.  In other words, the IRS can effectively wait until the taxpayer dies to bring such a challenge.  The adequate disclosure rules specify information about the donee and the gifted property that must be reported on the return.  For significant gifts of assets other than cash and marketable securities, the return should also include a qualified appraisal report, or at very least, a detailed statement and supporting financial information that provides the bases for the reported value of the asset – especially if the valuation of a business interest reflects a discount for lack or marketability or control.

Important Elections and Due Dates

There are also important elections that have to be made on a gift tax return that is filed by its original or extended due date.  For example, the election for spouses to split their gifts—such that each spouse is deemed to have made a gift of one-half the value of both spouses’ gifts—must be made on a timely filed return.  The annual federal gift tax return is due on the same day as the individual taxpayer’s income tax return (Form 1040), which is usually April 15 of the following year; if the due date for filing the Form 1040 is effectively extended, then the date for filing the gift tax return is also extended for the same period (six months after the original due date, usually October 15); but if the date for filing the Form 1040 is not extended, then the taxpayer must file a separate request to extend the time for filing the gift tax return (Form 8892).

The election to allocate (or not to allocate) GST exemption should also be made on a timely filed gift tax return for the calendar year when the gift is made.  Generally speaking, the generation-skipping transfer (“GST”) tax is an additional transfer tax that can be imposed on direct gifts to a taxpayer’s grandchildren or more remote descendants or upon distributions made to such “skip persons” from non-exempt trusts that were originally funded with gifts from the taxpayer.  For these purposes, each U.S. citizen or resident has a statutory lifetime GST exemption amount equal to the lifetime exemption from the gift and estate tax (in 2023, $12.92 million).   And for a trust to be “exempt” from GST tax, the taxpayer must allocate GST exemption to all gifts made to that trust on a timely filed gift tax return.  If there is a significant enough likelihood that distributions could be made to skip persons from the trust, GST exemption may be automatically allocated to such gifts under the statute.  However, a taxpayer may not want GST exemption automatically allocated to a particular gift in trust because the trust is more likely to be consumed by non-skip person beneficiaries; but the only way to avoid an automatic allocation of GST exemption is to elect out on a timely filed return.

img 2 Gift Tax Return

Late Filings and Remedial Actions

All of that said, even if a gift tax return is not timely filed—or did not include adequate disclosure of a gift or a necessary election—a taxpayer can nonetheless file a return or amend a previously filed return to include information that constitutes adequate disclosure and start the limitations period applicable to the IRS.  In certain circumstances, a taxpayer may also request relief to make a late election or to make a late allocation of GST exemption to a trust.

The professionals at The Innovative CPA Group LLC have the knowledge and experience necessary to prepare—or take remedial actions with respect to—the gift tax returns that are necessary or appropriate to accomplish the tax objectives of your lifetime giving.

If you require help in devising a lifetime gifting tax strategy or need remedial actions concerning your gift tax returns, our team of CPAs is prepared and available to assist you.

Article written by Steven Baker, CPA, Esq.

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2023-11-16T15:27:22+00:00November 16th, 2023|Estates and Trusts, Individual|

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