To paraphrase Mark Twain, be careful when reading the tax code. While a misprint won’t necessarily cause death, misinterpreting the wording can cause a fair amount of grief, including an extended time for the assessment of tax, penalties, and interest. That applies to gift taxes as well as income taxes. For example, unreported or undisclosed gifts extend the statute of limitations for gift tax assessment indefinitely (internal revenue code section 6501(c)(9)).
Here’s the wording from one of the exceptions to the general three year rule for the statute of limitations.
Internal revenue code section 6501(c)(9):
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.
Have you read that carefully? Then here’s another bit of nonfiction from the general rule of the treasury regulation that defines what “adequate disclosure” means.
If a transfer of property, other than a transfer described in paragraph (e) of this section, is not adequately disclosed on a gift tax return (Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return”), or in a statement attached to the return, filed for the calendar period in which the transfer occurs, then any gift tax imposed by chapter 12 of subtitle B of the Internal Revenue Code on the transfer may be assessed, or a proceeding in court for the collection of the appropriate tax may be begun without assessment, at any time.
Interpretation: When a taxpayer hasn’t reported a gift on Form 709 for a tax year, the statute of limitations remains open and the tax can be assessed at any time.
But what about the gift tax returns the taxpayer files in subsequent years? Those returns include a schedule that asks for information about prior year gifts so that current year tax can be properly calculated. Based on the wording of the code and the regulation, does understating or omitting the amount of prior year gifts and potentially causing current year gift tax to be underreported extend the statute of limitations?
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No, the statute of limitations will not be extended for gift tax returns for subsequent years just because the prior year gift amounts on those returns were understated, even if that resulted in underreported gift tax for those subsequent years.
For the gift tax returns for subsequent years when the taxpayer understated the amounts of prior year gifts, the national office view is that the language in section 6501(c)(9) “any tax imposed by chapter 12 on such gift may be assessed … at any time” refers to the tax imposed on the omitted gift that is subject to tax on that return (i.e., the current year gift amounts), and does not refer to omissions or understatements of the prior year gift amount on that return.
Treasury regulation 301.6501(c)-1(f) provides that: “If a transfer of property … is not adequately disclosed on a gift tax return … or in a statement attached to the return, filed for the calendar year period in which the transfer occurs, then any gift tax imposed … on the transfer may be assessed … at any time.”
Under the regulations, only the failure to disclose a gift on the return for the year of that gift keeps the assessment statute expiration date open, not a failure to accurately report the sum of prior year gifts on a return for a later year.
As a result, if the only problem with the subsequent year gift tax returns is understatement of the amounts of prior year gifts, then the understatement of gift tax due for those subsequent years may be assessed only within the normal section 6501(a) three year period.
The six year assessment statute expiration date for substantial omission in section 6501(e)(2) will not extend the assessment statute expiration date for gift tax returns whose only defect is underreported prior year gifts, because the language “if the taxpayer omits from … the total amount of the gifts made during the period for which the return was filed” also refers to the current year gifts. Gift tax returns are annual returns, even if the taxpayer is required to report prior year gifts and to properly use those when calculating the tax on the current year gifts.
It would take a legislative fix to section 6501(c)(9) and (e)(2) to close this gap.
Of course, if some other exception, like section 6501(c)(1) (false or fraudulent return with intent to evade tax) or section 6501(c)(2) (willful attempt to defeat or evade tax), applies, there would be an independent ground for an unlimited assessment statute expiration date. But there would have to be sufficient facts to support one of those exceptions.