In recent months, the IRS has fired two separate shots across the proverbial bow, highlighting the dangers of “incomplete” or “inadequate” reporting as it relates to imposition of penalties and the elongation of the statute of limitations. This blog post explores a Legal Advice memorandum wherein the IRS ruled that a gift tax return did not adequately disclose a gift and therefore the return did not start limitations period. A separate blog post, linked here explores an International Practice Unit issued by IRS Exam detailing when compliance is not “substantial” and therefore international information return penalties apply.
In Legal Advice issued by IRS Field Attorneys (LAFA), the IRS addressed the impact of an incomplete Form 709 on the statute of limitations. Like income taxes, the IRS has three years to assess the amount of any gift taxes after a Form 709 is filed. An exception applies to the tax on a gift not adequately disclosed on a gift tax return or in a statement attached to the return. In that case, the gift tax may be imposed at any time. The facts presented in the LAFA involve a taxpayer that, in addition to its failure to file gift tax returns for certain years, filed a Form 709 for one year that failed to describe the transferred property as well as provide a description of the method used to determine the value of the transferred property. The IRS concluded that the gift was not adequately disclosed on the gift tax return, and therefore the limitations period to assess gift taxes had not yet expired. A copy of the LAFA is linked here. The LAFA’s warning should especially be heeded by those taxpayers reporting on Form 709 a “zero-gift” transfer (i.e., transfer for full and fair consideration), where the purpose of the return filing is to start the statute of limitations. Taxpayers would be wise to err on the side of over-disclosure to insure that their filings meeting the adequate disclosure requirements set forth in Regulation sec. 301.6501(c)-1(f)(2).
The takeaway: filing is simply not enough. A return that is incomplete is no return at all, potentially exposing the taxpayer to an unlimited statute of limitations. As tax practitioners, we are well advised to heed this IRS warning and make sure that the returns filed by our clients meet the minimum thresholds for disclosure.
If you have any questions related to IRS reporting disclosures, or any other tax issue, please do not hesitate to contact me at (214) 749-2464 or email me at email@example.com.