Unwanted IRS Time Machine – Is Your Gift Tax Return Actually Done?
Taxpayers may assume that once a gift tax return is filed, they can sit back and avoid worrying about the IRS making adjustments once the general three-year statute of limitations has passed. But the IRS has a powerful “rewind-the-clock” tool that taxpayers may inadvertently trigger if they aren’t careful when preparing any filed gift tax returns. The problem is that certain types of gifts – such as partnership interests – require specific descriptions to be included on the return, or else the IRS can claim that an open-ended statute of limitations period applies. It is important to consult with counsel or get professional advice on the contents of your gift tax return in order to have peace of mind that your return won’t be resurrected from the dead at a future date.
Internal Revenue Code section 6501(a) applies a general three-year statute of limitations to most tax returns filed by a taxpayer, including a gift tax return. Once this time period has passed, the IRS is prohibited from making adjustments to the return. Of course, there are exceptions, such as when no gift tax return is filed (creating an open-end period for the IRS), the return is fraudulent (same), or the return is alleged to have omitted tax that is greater than 25 percent of the total tax actually owed (which permits a 6-year period). Perhaps the most concerning exception is in Code section 6501(c)(9), which allows the IRS to make an assessment at any time for a gift tax return which either does not include a required gift or the gift was not disclosed “in a manner adequate to apprise” the IRS of the nature of the item. Although the concept of adequate disclosure is not necessarily defined in the IRC, a regulation provides a safe harbor. Too detailed to list here, Treas. Reg. § 301.6501(c)-1(f)(2) contains a long laundry list of items that must be included by a taxpayer on the return concerning the gift in order for the IRS to deem it adequately disclosed. The exhaustive nature of the regulation can make it easy for a disclosed gift to fail to satisfy the safe harbor provisions, making it likely the IRS could challenge a gift in a subsequent audit and make an assessment, even many years after the return was filed.
This was the issue raised in FAA20152201F. The Donor had reported two gifts of partnership interests on the gift tax return, but IRS Chief Counsel attorneys decided that the gift descriptions included on the return were inadequate, allowing the IRS to assess gift tax under Code section 6501(c)(9) if the normal section 6501(a) assessment period had run. The IRS identified numerous deficiencies with the gift descriptions on the return. First, the Donor included an EIN for a partnership that was missing a digit. Because the IRS did not know the placement of the missing digit, it was unwilling to look up 70 possible EIN combinations to track down the right entity. Furthermore, the return included an abbreviated name of the partnership so that, even if the proper EIN had been provided, the names would not have matched up. The IRS deemed these mistakes to constitute failure to adequately describe the partnership.
In addition, the Donor’s gift tax return did not include a description of the financial data used to determine the value of the partnership interest, nor did it specifically identify the amount of each claimed valuation discounts that was applied – both requirements set out in the safe harbor. The gift description similarly lacked any information about the 100 percent value of the partnership since the appraisal was based on the net assets.
Not that taxpayers and their advisers intentionally use shortcuts when putting together a gift tax return, but it can be easy in the rush of things to not take the time to carefully address each element of the safe harbor detailed description regulation. The smallest of foot-faults may create an opportunity for the IRS to claim that an assessment can occur after the normal three-year statute of limitations period has passed. Instead of letting haste or inattentiveness ruin careful planning – seek tax advice at the start and take time to prepare your gift tax return for success.