So What if It’s Late? Why You Should File Gift Tax Returns on Time

October 9, 2013Articles

If you are like most advisors, you probably have clients who scrambled to complete gifts at the end of 2012, before anyone knew what Congress would do about the gift, estate and generation-skipping transfer tax (GST) exemptions. As October 15 looms, many are scrambling again - this time to track down the information and valuation reports required to timely file gift tax returns for many of those same last minute clients.

A CPA friend of mine recently asked me an interesting question -- So what if it's late? His thought was that his client wouldn't owe a gift tax because the client's gift was far below the $5.12 million exemption for 2012. Because there's no penalty for filing a late return when no tax is due, he figured that it really didn't matter whether the return was filed on time.

In some respects this CPA was right, but consider the following:

  1. Filing the return starts the running of the 3 year time period for the IRS to challenge the values in the return (assuming, of course, that you "adequately disclosed" the gifts).

  2. If you want to allocate GST exemption to the transfer based on the value of the gift on the date of the transfer, you must file the gift tax return on time.

The first reason to file on time is obvious. The sooner you file, the sooner the limitations period expires and the sooner your client has closure.

The second reason is more complicated. If you don't file a gift tax return on time, you lose the ability to allocate GST exemption based on the value of the property on the date of the gift. Instead, you need to make a late allocation of GST exemption using the value of the gifted property on the date of the late allocation. This requires an updated valuation, which costs money. Also, if the gifted property appreciates between the time of the gift and the time the late return is filed, the client needlessly wasted GST exemption by filing late.

If the trust that receives the gifted property is subject to the "automatic allocation" rules, then this GST issue disappears. Determining whether a trust is a "GST trust" that gets an automatic allocation of GST exemption takes time and close analysis. And, sometimes, it may be difficult to reach a conclusion. As a result, the best practice is to do whatever you can to make sure the return is filed on time.