It’s not how much you give that counts, unless of course you’re giving more than the annual gift tax exemption amount. In that case, the amount does matter, and you need to file a gift tax return.
In Office of Chief Counsel Memorandum 2016-43020, the taxpayer filed a gift tax return for a taxable gift. The current year gift was reported on the timely filed return, but the taxpayer failed to report prior year gifts on the return. Because the amount of prior year gifts was necessary to calculate the tax on the current year gift, the tax remitted was less than was actually due.
Gift tax returns fall under the general statute of limitations, meaning tax must be assessed within three years of when the return was filed. Internal revenue code section 6501(c)(9) provides an exception to the three-year period for unreported gifts, allowing the IRS to assess tax at any time.
Here’s the wording of code section 6501(c)(9).
Gift tax on certain gifts not shown on return
If any gift of property the value of which (or any increase in taxable gifts required under section 2701(d) which) is required to be shown on a return of tax imposed by chapter 12 (without regard to section 2503(b)), and is not shown on such return, any tax imposed by chapter 12 on such gift may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. The preceding sentence shall not apply to any item which is disclosed in such return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature of such item.
The question: Because the taxpayer did not report prior year gifts, and paid less tax than was actually due, does section 6501(c) (9) allow the IRS to assess the additional tax after the three-year period?
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No, the statute is not extended.
Section 6501(c)(9) only applies to gifts that were not reported on a gift tax return. Because the current year gift was reported on the gift tax return, the extended period of limitation for assessing additional tax due on the reported gift in section 6501(c)(9) does not apply to the reported gift, even though prior years’ gifts were not reported on the return.
Section 6501(a) provides that, generally, tax must be assessed within three years of when the return was filed. Section 6501(c)(9) is a limited exception to this general limitation period for unreported gifts.
There are two rules in section 6501(c)(9) that limit when the special limitation period applies.
The first rule is that it only applies to a gift that is not reported on the gift tax return.
The second rule is that it does not apply to an item that was adequately disclosed on the return, or on an attachment to the return.
As such, there is a two-step analysis for applying the special limitation period in section 6501(c)(9).
Step one is to determine if the gift was reported on the gift tax return. If the gift was reported, then the special limitation period does not apply to the gift and the analysis is concluded.
If the gift was not reported, then the analysis moves to step two. Step two is to determine if the item was adequately disclosed. If the item was disclosed, then the special limitation period in section 6501(c)(9) does not apply to the item. If the item was not disclosed, then the special limitation period applies and tax may be assessed on the gift at any time.
Although it is arguable that treasury regulation section 301.6501(c)-1(f)(1) is silent concerning the omission of prior taxable gifts, the clear language of section 6501(c)(9) precludes it from applying to a gift that was reported on the gift tax return even if prior years’ gifts were omitted.
In this case, the current year gift was reported on the gift tax return. Thus, step one is met and the matter is concluded. Therefore, despite the failure to report prior years’ gifts on the return, the special limitation period in section 6501(c)(9) does not apply to the current year gift.