Articles & Alerts

A Bit of Welcome Leniency Related to Adequate Disclosure

December 20, 2023

The Internal Revenue Service (IRS) has historically taken a strict stance when it comes to the completion of gift tax returns. Very specific language needed to be included with these filings in order to start the statute of limitations – the duration of time that the IRS has to assess a tax. Generally, this period is within three years of the date the return was filed.

In order to appropriately begin the statute of limitations, a gift tax return needed to include adequate disclosures which included:

  • A description of the transferred property and any consideration received by the donor;
  • The identity of, and relationship between, the donor and each donee;
  • If the property is transferred in trust, the trust’s employer identification number (EIN) and a brief description of the terms of the trust (or a copy of the trust instrument in lieu of the description);
  • Either a qualified appraisal or a detailed description of the method used to determine the fair market value of the gift; and
  • A statement describing any position taken that is contrary to any proposed, temporary or final Treasury regulations or revenue rulings published at the time of the transfer.

If all the above were reflected on a gift tax return the statute of limitations would begin.

Earlier this year, however, the U.S. Tax Court provided some relief to taxpayers and their tax practitioners with respect to these disclosures. The court reviewed a gift tax return where the IRS issued a notice of deficiency for over $8,000,000 in taxes and penalties. The IRS claimed that a gift tax return in question failed to adequately meet the disclosure standards. While these adequate disclosure regulations were historically restrictive, the Tax Court took a more lenient approach in ruling that a flawed gift tax disclosure by a taxpayer can still substantially comply with the IRS’s regulations. Whereas, in the past, simple errors such as reporting an incorrect Trust EIN or missing a comma could cause an issue, the case deemed that a “disclosure is adequate if it is sufficiently detailed to alert the Commissioner to the nature of the transaction so that the decision to select a return for audit is reasonably informed.”

While it’s still paramount to follow the adequate disclosure criteria above, taxpayers can breathe easier knowing their gift tax returns will begin the statute of limitations even if the returns themselves are not perfect, but substantially comply with the spirit of the IRS disclosure requirements.

To learn more about adequate disclosure in connection with gift tax returns, please contact Adam Rubinfeld, Director in Anchin’s Private Client group, or your Anchin Relationship Partner.