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When Oversharing is a Good Thing

The outcome of the 2020 elections signaled to many advisors that a change to the federal estate and gift tax laws was forthcoming. Of particular concern was that any change made in 2021 might apply retroactively to January 1, 2021. That concern motivated many to make substantial gifts in the waning days of 2020.

The deadline to report those gifts is now fast approaching. Gift tax returns must be filed by April 15th of the year following the year a gift is made. And though the IRS extended the filing deadline for filing 2020 individual income tax returns, that extension does not apply to gift tax returns.

In ordinary, non-pandemic, years, when someone files a request to extend the filing date for their personal income tax return, that extension also served as an automatic extension of the filing date for their gift tax return. Again, these are not normal times, so a separate extension of a gift tax return is a must for many this filing season.

Ensuring a timely filed gift tax return is only part of the equation. Equally significant is ensuring that a gift tax return adequately discloses the gift made. Failing to adequately disclose a gift on a gift tax return can have devastating consequences many years down the road.

Adequate disclosure of a gift is dependent on the type of gift made. At a minimum, a gift tax return should include the following information:

  • A description of the property given as a gift.
  • The identity of, and relationship between, the person making the gift and the person receiving the gift.
  • If a trust is the recipient of the gift, then the trust’s tax ID number and a copy of the trust instrument.
  • A detailed description of the method used to determine the fair market value of the property given as a gift.
  • If the gift involves a closely-held entity or is part of a transaction such as a grantor retained annuity trust, then a description of the transaction, the relationship of all parties involved, the tax ID of all parties involved, the full name of all parties involved, and a detailed description of the method used to determine the value of the gift, especially if valuation discounts are taken. Many gift tax returns attach an appraisal, prepared by a qualified appraiser, to meet these requirements.

Failure to meet these requirements and adequately disclose a gift leaves the door open, indefinitely, for the IRS to assess a tax on the gift. You read that right, failing to adequately disclose a gift on a gift tax return means the statute of limitation for the IRS to audit and assess a tax on that gift does not run. An open-ended statute of limitation could easily come back to haunt a taxpayer, or a taxpayer’s family, by generating a gift tax or estate tax that was unexpected or long believed to be done and dusted.

If you made a gift in 2020 and want to ensure adequate disclosure of that gift, please do not hesitate to contact your attorney at Carlile Patchen & Murphy or any member of the Family Wealth & Estate Planning Group.


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