Final Rules on Gift Reporting

By:  Barry Boscoe, CFP

Prior to August 5, 1997 gifts made could be revalued by the IRS years after the transaction took place imposing taxes and penalties.

Under the 1997 tax law, the IRS can’t revalue a prior gift after the statute of limitations has expired – provided the gift was “adequately disclosed” on a gift tax return.

In order to meet the adequate disclosure, the gift tax return must provide the following:

the nature of the gift;
the relationship of the parties;
the basis for the valuation.
By complying with this requirement, you are guaranteeing that the IRS will not attempt to revalue your gifts years later, resulting in unexpected taxes.  Therefore, you can rely on the unused portion of your applicable exclusion amount (i.e. currently $675,000).

Final regulations make it clear as to what constitutes adequate disclosure.  They also allow for an appraisal complying with specific requirements to be submitted in lieu of a detailed description of the method used to determine the property’s fair market value.

The dilemma for taxpayers is how to treat non-gift transactions.  In reality, such a transaction need not be reported on a gift tax return.  However, if it isn’t “adequately disclosed”, there is nothing to prevent the IRS from claiming a higher value and thus imposing taxes and penalties years later.

Ironically, the proposed regulations imposed greater reporting demands on non-gift transactions than reportable transactions.  The taxpayer was required to submit all information otherwise required for adequate disclosure plus an explanation of why the transfer was not subject to gift tax.  This requirement applied even to transfers to family members in the ordinary course of business (i.e. salaries paid to children working in the family business).

The final regulations, however, offer some relief.  One, they limit the information required in non-gift transactions and two, provide that transfers to family members in the ordinary course of business are deemed adequately disclosed if they are properly reported by all parties for income tax purposes.

(Note:  This should go under gift tax reporting requirements.  Should be in the color blue, underscored and linked to Articles.)