Understanding Gift Taxes and Audits
Gift taxes are imposed by the IRS on individuals who give gifts exceeding a certain threshold. Failure to file a gift tax return or filing an incorrect return can trigger an audit.
Common Triggers for Gift Tax Audits
- Failing to File a Gift Tax Return: If you make a gift that exceeds the annual exclusion amount ($15,000 in 2021), you are required to file a gift tax return. Failing to do so can trigger an audit.
- Large Gifts: Making a large gift, such as transferring a significant portion of your estate, may be viewed by the IRS as an attempt to avoid estate taxes, triggering an audit.
- Suspicious Gifts: Gifts made to individuals with a history of tax issues or criminal activity may raise red flags and lead to an audit.
- Valuation Disputes: Discrepancies between the reported value of the gift and the actual value may prompt the IRS to initiate an audit to resolve the dispute.
- Gift Splitting: Splitting a gift with your spouse may trigger an audit to ensure that each spouse reported the correct amount.
What to Expect During a Gift Tax Audit
During an audit, the IRS will:
- Request documentation to support the gifts made, including bank statements, gift certificates, and appraisals.
- Review tax returns and related documents to verify the accuracy of gift reporting and identify any unpaid taxes.
- Issue a notice of deficiency if additional taxes are owed, providing an opportunity to appeal the decision.
Gathering Documentation for a Gift Tax Audit
To prepare for an audit, gather:
- Receipts and invoices for gifts
- Bank statements for cash gifts
- Appraisals for difficult-to-value gifts
- Gift tax returns filed in the past
- Correspondence related to the gifts
Responding to Gift Tax Audit Notices
- Read the notice carefully and understand the IRS’s requests.
- Gather all relevant documents.
- Seek professional advice if needed.
- Respond promptly within the deadline.
- Be honest and transparent in your response.
- Consider appealing the decision if you disagree with the IRS’s findings.
Working with a Tax Professional
A tax professional can:
- Help understand the audit process and identify issues.
- Prepare a response to the audit.
- Represent you in front of the IRS.
Appealing a Gift Tax Audit Decision
- File a formal written protest within 30 days of the IRS’s decision.
- Understand the appeals process and consider hiring professional help.
- Gather supporting documentation.
- Be prepared to negotiate a compromise.
Avoiding Gift Tax Audits
- Be mindful of the annual gift tax exclusion ($15,000 in 2021).
- Keep accurate records of all gifts made.
- Be aware of the gift tax rules when giving gifts to family members.
Why Preparation is Key
Preparation for a gift tax audit is crucial to:
- Avoid delays or complications.
- Prevent mistakes that could trigger an audit.
- Keep accurate records.
- Understand the rules.
- Seek professional help.
- Respond promptly.
Filing a gift tax return may trigger an audit if certain red flags are raised. Understanding the triggers, preparing for an audit, and working with a tax professional can help navigate the process effectively.
What the IRS is actually looking for that could trigger a tax audit
Are gift tax returns subject to IRS audit?
Gift tax returns are subject to IRS audit, the same as federal income tax returns. There are many potential pitfalls for those who are unfamiliar with all of the detailed IRS requirements for properly reporting and substantiating gifts made. Mistakes can be costly to fix and lead to a subsequent audit during lifetime or at death.
Can a trust file a gift tax return?
So for the formulas in these mechanisms to work a gift tax return must be filed to tie into. The trust cannot file a gift tax return to report the sale to thereby toll the statute of limitations (the time period during which the IRS can audit). Should the beneficiaries of the trust file gift tax returns reporting the sale as a non-gift transaction?
Why are gift tax returns triggered?
Many of these gift tax returns were triggered out of prudent efforts by taxpayers planning to reduce their estates before the 2020 election in case the Democrats take control in Washington and pass the harsh wealth and estate tax changes they have proposed.
Do I need to file a gift tax return?
IRS gift-tax–filing requirements seem simple enough at first glance—give any recipient other than a spouse a gift in excess of the annual gift-tax exclusion ($16,000 in 2022, $17,000 in 2023), and you should file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.