Beginning in 2011, the Internal Revenue Service started cracking down on taxpayers who did not file gift tax returns after making gifts that required reporting. Working with state or county agencies, the IRS started using real estate property records to spot land transfers between family members for no or little consideration, according to an October 2011 Forbes magazine article. Taxpayers who are caught not filing a gift tax return and owe taxes can count on paying the failure-to-file penalty along with interest charges.
a. Who Must File
You do not have to file a gift tax return as long as the amount you give to one person does not exceed $ 14,000 (for the 2013 calendar year). If you are married, you and your spouse must file separate gift tax returns, Form 709. If the gift is community property, the fair market value is divided equally between you and your spouse. As the giver, you are responsible for filing the gift tax return and paying any related taxes.
b. When to File
A Form 709, Gift Tax Return, must be filed between January 1 and April 15 in the calendar year that the gift was made. In the event that Form 709 cannot be filed by the deadline, Form 8892 should be filed (Application for Automatic Extension of Time to File Form 709). Form 8892 automatically extends the time for filing a gift tax return by six months. If you filed for an extension of time to file your individual income tax return, that extension automatically applies to your gift tax return.
c. Potential Penalties
i. Late Filing Penalty: If you miss the filing deadline, IRC § 6651(a)(1) imposes a late filing penalty equal to five percent of the net tax due. This penalty is imposed each month with respect to which the taxpayer is delinquent, but may not exceed 25 percent of the net tax amount. If the taxpayer can establish that the late filing was due to reasonable cause and not wilful neglect, the penalty may be waived. Treas. Reg. § 301.6651-1(c)(1). However, since the filing of a tax return is considered a non-delegable duty, reliance on an attorney to file an estate tax return was held not to constitute reasonable cause for abating the failure to pay penalty under IRC § 6651. Boyle v. United States, 469 U.S. 241 (1985).
ii. Fraudulent Failure to File Penalty: If the IRS considers the return was filed late because of fraud, an additional penalty of 15 percent is imposed per month. The fraud penalty cannot exceed 75 percent of the net tax due. IRC § 6651(f).
iii. Failure to Pay Tax Penalty: IRC § 6651(a)(2) imposes a penalty of 0.5 percent per month for the failure to pay tax. The maximum penalty is 25 percent, which would accrue if the payment were 50 months late. The penalty does not apply if reasonable cause is established. Treas. Reg. § 301.6651-1. Reasonable cause generally will be established if the taxpayer has exercised ordinary business care and prudence.
iv. Valuation Understatement Penalties: If the IRS determines that the gift was intentionally undervalued by 50 percent or more and the tax underpayment is greater than $ 5,000, a 20 percent penalty is imposed on the tax underpayment amount. IRC § 6662(g). The penalty increases to 40 percent on the tax underpayment amount if a “gross valuation understatement” occurs. A gross valuation understatement occurs if the gift was undervalued by 75 percent or more and the tax underpayment exceeds $ 5,000. IRC § 6662(h). In addition, the IRS charges interest on the unpaid tax amount starting from the first day the tax return was due until all taxes and penalties are paid in full. The penalty does not apply if reasonable cause can be shown for the understatement. IRC § 6664(c)(2).
v. Accuracy-related (negligence) Penalty: An accuracy-related penalty is imposed on any portion of an underpayment attributable to negligence. For purposes of this section, negligence is defined as “any failure to make a reasonable attempt to comply with the provisions of the IRC.” The penalty imposed equals 20 percent of the underpayment. IRC §§ 6662, 6662(c).
Any gift tax not paid on or before the due date (without regard to extensions) will attract interest at the underpayment rate established by IRC § 6621(a)(2). IRC § 6601(a).
e. Collection Devices
i. General lien: Under IRC § 6321, a lien arises in favor of the United States if any tax owed is not paid. The lien arises by operation of law, and attaches to all property, real and personal, owned by the taxpayer, including property acquired after the lien arises. Treas. Reg. § 301.6321-1.
ii. Special Gift Tax Lien: IRC § 6324(b) provides an additional lien for gift taxes. If the tax is not paid by the donor when due, it becomes a special lien on all gifts made during the period for which the return was filed. The lien continues for 10 years from the date gifts are made. The special gift tax lien is in addition to the general lien. Treas. Reg. § 301.6324-1(d).
iii. Transferee Liability: If the donor fails to pay gift tax, the donee becomes personally liable for the tax. The donee’s liability is limited to the value of the gift. IRC § 6324(b); Treas. Reg. § 301.6324-1.
iv. Time Period for Making Assessment Against Transferee: An assessment may be made against the transferee for up to one year following the expiration of the period of limitations for assessment against the transferor. IRC § 6901(c)(1).
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