Omission of Gift from a Year Does Not Hold Statute Open for All Intervening Years Where Gift Tax May Be Understated

Under IRC §6501(c)(9) the IRS has an unlimited statute of limitation to assess gift taxes on a gift that is not reported on a gift tax return absent adequate disclosure, even if a Form 709 was filed for the year in question to report other gifts. 

However, what happens if the omitted gift does not create gift taxes in the year in question but the omission of that gift from the prior gifts on later returns causes the taxes for that year to be understated?  Does the IRS get an unlimited statute on those later returns to collect the tax that would have been due if the omitted gift had been included in the “prior gifts” portion of the gift tax calculation for those later years?

An example may help understand the issue.  Let us assume the unified credit for Year X (8 years ago) allowed for lifetime gifting of up to $1,000,000 in value at that time.  In Year X the taxpayer made his first taxable gifts.  He made two taxable gifts after the annual exclusion of $500,000 each to two individuals.  However by accident only one of the gifts was actually reported on the Form 709 for year 8.

Two year later in year Z (6 years ago) when the lifetime gifting limit remained at $1,000,000 the taxpayer considered again making gifts.  The CPA and attorney had not been involved in the prior gifts and, relying the Form 709 prepared for Year 8, advised the taxpayer to make a $500,000 gift to fully utilize his lifetime gifting.

In the current year an IRS agent opens an exam on the gifts of the taxpayer and uncovers the $500,000 additional gift that was not reported in Year X. Including that gift on Year Z’s return still results in no gift taxes being due—but year Z’s $500,000 should have generated a gift tax.  The question now becomes—can the IRS collect the tax due on the six year old gift based on the omission of the gift eight years ago?

In Emailed Advice 201614036 the National Office concluded the answer is no—Section 6501(c)(9) only holds open the year the gift was omitted from, not any intervening years which may have had an underpayment of gift tax due to the omitted gift.  Rather, for those years the IRS must assess the additional tax within the standard three year statute of limitations absent some other provision that would allow the statute to remain open (such as fraud for the year in which the IRS seeks to assess tax).

The memo holds:

For the gift tax returns for subsequent years when the taxpayer understated the amounts of his prior year gifts, the national office view is that the language in § 6501(c)(9) “any tax imposed by chapter 12 on such gift may be assessed … at any time” refers to the tax imposed on the omitted gift that is subject to tax on that return (i.e., the current year gift amounts), and it does not refer to omissions or understatements of the prior year gift amount on that return. Accordingly, § 6501(c)(9) does not extend the ASED for gift tax returns for subsequent years just because the prior year gift amounts on those returns were understated, even if that resulted in underreported gift tax for those subsequent years.

The substantial omission extension of the statute to six years under IRC §6501(e)(2) also would not apply as it also is limited to current year gifts omitted from the return:

The six-year ASED for substantial omission in § 6501(e)(2) will not extend the ASED for gift tax returns whose only defect is underreported prior year gifts, because the language “if the taxpayer omits from … the total amount of the gifts made during the period for which the return was filed” also refers to the current-year gifts; gift tax returns are annual returns, even if the taxpayer is required to report prior year gifts and to properly use those when calculating the tax on the current year gifts.