When a Gift Tax Return is Required for Estate Planning

Don’t think making a tax free gift means a gift tax return isn’t due. The general Estate Planning rule is you need to file a gift tax return for any gift that exceeds the annual gift tax exclusion ($14,000 per recipient in 2013). A gift that exceeds the annual exclusion either reduces your lifetime estate and gift tax exemption or is taxable. The IRS requires a gift tax return so that it can track both reductions in your lifetime exemption and lifetime gift taxes paid. Keepping all records and documents should be part of every estate planning strategy.

A few years back the IRS realized it could collect a lot of penalties and interest with better enforcement of the gif tax return requirements. It started programs to identify unfiled gift tax returns and impose penalties. For example, it obtains real estate title records from states and localities. It then uses those records to identify title transfers apparently made without compensation, and then sends letters to the original owner reminding them of gift tax reporting rules.

You also should consider filing a gift tax return when one isn’t required if you transferred property without a readily-determinable market value or claimed a discount on a property’s value. When a return is filed, there’s a three year statute of limitations (seven years if the IRS thinks there was a significant understatement of value). But there’s no statute of limitations when no return is filed. The IRS can come back years or decades later, argue that the property was undervalued, and impose a lot of penalties and interest on you or your estate. It’s safer to file a return.

The gift tax return is Form 709. It and the instructions are available free at www.irs.gov.

RW November 2013