An Important Planning Step Gift Tax Returns:

WRITTEN BY JOY MATAK, JD, LLM

With the federal estate tax exemption currently at $12.92 million per U.S. person, individuals have an opportunity to transfer significant wealth. In general, taxpayers are required to disclose any gift exceeding $17,000 (in 2023) on a Form 709 in the year following the transfers.

Since the gift and estate tax are based on the concept of a unified credit, gifts are aggregated and disclosed again on an estate tax return. A wellprepared gift tax return that meets the adequate disclosure requirements outlined in Treas. Reg. Sect. 301.6501(c)-1 will start the statute of limitations running, giving the IRS only three years to challenge a transaction. On the other hand, failure to satisfy the rules for adequate disclosure on a gift tax return could give the IRS an unlimited window to overturn a transaction many years after the fact.

1. Why is filing a gift tax return so complicated?

Filing a gift tax return appears to be a simple thing. After all, the form the IRS offers to report gifts is short – only five pages! And yet, we often find ourselves producing reams of paper to support the disclosures about the planning that had been done.

Lack of sufficient supporting documentation could prevent the statute of limitations from running and potentially invite follow-up communications from the IRS about the planning transactions. Of course, a “kitchen sink” approach to filing gift tax returns is not just about meeting adequate disclosure requirements to run the statute of limitations. Where a taxpayer can demonstrate a good faith attempt to comply with the rules set for disclosing transactions, the IRS may decide to accept the return as filed and leave the client alone. In such cases, the taxpayer would be able to point to an exhibit that had already been provided in response to most questions that an auditor might ask.

2. A gift tax return supports the planning.

Strategic planning can protect assets from creditors while allowing the wealth you create to grow into a great legacy for your loved ones, their children, and future generations of your family. Transferring significant wealth is often a long process. We spend time evaluating the opportunities available to our clients in order to construct unique plans that resemble their goals.

A gift tax return is the first time the IRS will learn about the planning that has been done. The process allows a taxpayer to dictate the initial terms of any potential review that the IRS might undertake relative to the planning. Further, by adequately disclosing planning transactions on a gift tax return, the taxpayer starts the clock running on a three-year statute of limitations.

3. The gift tax return provides advisers with a second, thorough look.

Sophisticated planning is often multi-faceted, involves