Timely tax reporting to the Internal Revenue Service (IRS) is fundamental in effective wealth management, especially in estate planning. A long-established tenet in this sphere posits that, upon making a taxable gift, it should be reported promptly to the IRS, irrespective of whether any gift tax is due because of the available lifetime credits. The rationale behind this is that filing the gift tax return triggers the statute of limitations. Except in instances of fraud, the IRS cannot challenge the value of the gift after three years have elapsed. A recent Tax Court case underscores the significance of adhering to this rule, shedding light on some intriguing and unusual circumstances.
Case Background
The case in question involved a taxpayer who funded a life insurance policy in 2006 and transferred ownership to other family members in 2007. Subsequently, in 2012, the taxpayer opted into the IRS’s voluntary offshore disclosure program to rectify his tax obligations from 2004 to 2009. The disclosure included a gift tax return for 2006, specifically for purchasing the insurance policy.
Dispute and Outcome
A disagreement arose when the IRS declared in 2016 that there was no gift in 2006 and the actual gift occurred in 2007. Objecting to this classification, the taxpayer withdrew from the program. Following his withdrawal, the IRS issued a gift tax deficiency of $4.4 million for the 2007 gift in 2019.
However, the Tax Court ruled that the IRS’s claim was out of time. They clarified that the gift tax statute of limitations commences when the IRS is notified of the transfer, regardless of whether the transfer is finalized in a later year.
In this case, the IRS was notified about the transfer when the taxpayer submitted his forms for the voluntary disclosure program in 2013. Consequently, the statute of limitations, including an extension, expired in 2017.
Legacy’s Expert Tax Planning Services
This case underscores the complexity of tax planning and the potential implications of failing to adhere to established guidelines. At Legacy Private Trust Company, we offer expert tax planning services to navigate these intricate rules effectively, ensuring your wealth’s optimal preservation and growth. Our team of experts is committed to providing a comprehensive, tailored approach, mitigating risks, and ensuring that your financial decisions align with the latest tax laws and best practices. We help you understand your obligations and potential opportunities to maximize your estate while minimizing your tax liability.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or connect@lptrust.com.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.
