Avoiding Gift Return Problems with the IRS

The IRS recently said it was beginning a program to identify people who do not file required gift tax returns. It believes the program will identify a large amount of unpaid taxes.

Gift tax returns must be filed when a gift exceeds the annual gift tax exclusion, currently at $13,000 per recipient per year. Gifts that exceed the annual exclusion either reduce the annual lifetime gift tax credit (which exempts up to $1 million of gifts from taxes) or are subject to gift taxes.

The IRS believes technology and agreements with state governments let it identify more instances of unfiled gift tax returns. It will start by sending letters to people it suspects have not filed returns, suggesting that they file.

We recommend filing gift tax returns even when they are not required. The IRS likes to go back and revalue gifts made in the past, sometimes many years in the past. When no gift tax return was filed, there is no statute of limitations on revaluing gifts. But when a return was filed, the IRS has only three years to audit the return and make adjustments. The limitations period is seven years if the understatement of tax is significant. When there is any chance the IRS could question the value of a gift, it is best to file a gift tax return to start the statute of limitations.

January 2010. RW