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How gift tax returns document transfers and valuations

Key takeaway

Gift tax returns document transferred property, recipients and valuation support, and adequate disclosure starts the applicable assessment period.

For a business interest, real estate interest or trust gift, organize the file around three questions: what changed hands, how its value was determined and what the return discloses.

Disclosure and the assessment period

For adequately disclosed gifts, the assessment period generally ends three years after filing, subject to the qualifications below.

Adequate disclosure starts that period. It does not prevent the IRS from assessing additional gift tax during it.

  • A return filed early is treated as filed on its prescribed filing date.
  • A gift required to be reported that is unreported or inadequately disclosed can be assessed at any time.
  • Failure to file, or a false or fraudulent return intended to evade tax, permits assessment at any time.
  • Omitted gifts exceeding 25 percent of the total gifts stated on the return can trigger a six year assessment period. Adequately disclosed items are excluded from this omission test.
  • The taxpayer and the IRS can consent in writing to an extension before the assessment period expires. Any subsequent written extension must precede expiration of the previously agreed period.

After the applicable period expires, later gift and estate tax computations use the gift's finally determined value. Filing alone does not establish that value.

Final value can be the adequately disclosed reported value that the IRS did not contest before expiration, an IRS specified value the taxpayer did not timely contest, or a court or settlement value.

What the return and attachments must disclose

The ordinary adequate disclosure checklist below is subject to the regulation's effective date limits for both the gift and the return filing. Special valuation transfers have separate requirements covered in other guides.

Provide the following information on the gift tax return or an attached statement, together with the valuation information described in the next section:

  • A description of the transferred property and any consideration the donor received.
  • The identities of the donor and each recipient, and their relationships.
  • For a trust gift, the trust's tax identification number and either a brief description of its terms or a copy of the trust instrument.
  • A statement describing any position contrary to proposed, temporary or final Treasury regulations or published revenue rulings existing when the transfer occurred.

Use this list to organize the transfer documents, trust information and valuation materials before reviewing the return with your preparer.

Valuation support for the transferred property

Value gifted property as of the gift date, considering all relevant facts and elements of value then existing. A local property tax assessment is acceptable only if it represents fair market value on that date.

Unless you use the qualifying appraisal alternative below, disclose the valuation method, financial data and explanations of adjustments, restrictions considered, and descriptions of discounts claimed.

For an interest actively traded on an established exchange with published daily quotations, the valuation disclosure requirement can be satisfied by identifying the exchange, the security's CUSIP number and the mean of its highest and lowest quoted selling prices on the valuation date.

Business and other entity interests without active trading

For an interest in an entity that is not actively traded, describe discounts claimed on the interest or on assets owned by the entity.

If valuation properly rests on net asset value, disclose the whole entity's fair market value without discounts, the proportion transferred and the reported value of the transferred interest.

If whole entity value is omitted, the taxpayer bears the burden of demonstrating that a method other than net asset valuation is proper.

Include the required information for underlying entities that are not actively traded when it is relevant and material to valuing the transferred interest.

Reporting a discounted value

If a gift reported in Schedule A Part 1, 2 or 3 includes any discount, answer Yes to Schedule A's discount question and attach an explanation of the discount's basis and amount.

This reporting requirement does not establish entitlement to a discount.

The appraisal alternative

A qualifying appraisal can satisfy the detailed valuation disclosure requirement instead of the preceding valuation information. It does not replace the other disclosure requirements, and this route does not universally require an appraisal.

The appraiser must regularly perform appraisals or publicly hold themselves out as an appraiser. The report must describe qualifications relevant to the property, including background, experience, education and any professional appraisal association memberships.

The appraiser cannot be the donor, recipient, either person's family member as defined by the applicable tax statute, or an employee of any of them.

The report must include:

  • The transfer date, appraisal date and appraisal purpose.
  • A description of the property and the appraisal process.
  • Assumptions, hypothetical conditions, limiting conditions and property restrictions affecting the analysis, opinions and conclusions.
  • Information considered, including business financial data detailed enough for another person to replicate the valuation.
  • Appraisal procedures and reasoning supporting the analysis, opinions and conclusions.
  • The valuation method, its rationale and the procedure used to determine fair market value.
  • The specific valuation basis, such as comparable transactions, similar interest sales or an approach based on assets.

Keep the supporting records permanently

People subject to federal gift taxation must keep permanent records establishing gifts, allowable deductions and other return information. Retain the documents used to prepare the return so they remain available for inspection.

On request, furnish gift documents, appraisal lists, obtainable financial statements and other obtainable information necessary to determine the tax.

For each life insurance policy listed on the return, obtain the insurer's Form 712 and file it with the return. If specifically requested by an internal revenue officer, the insurer files the statement directly.

Keep the filed return and its attachments together with the transfer documents and valuation support. This gives your next review a clear starting point.

Fair market value: The price at which property would change hands between a willing buyer and willing seller, neither compelled to act and both reasonably informed.

Annual gift tax exclusion: Qualifying present interest gifts to each recipient are excluded up to the applicable annual limit, separately for each donor and calendar year. Future interest gifts do not qualify, and gifts to a spouse who is not a citizen use a separate limit.

An Investor Advantage perspective on preparation

A consistent routine is useful when assembling a document file. This passage offers a broader perspective on following through:

"You also need to have a system like FAST or something similar to it that you're going to follow every step of the way. At times you're going to feel down and exhausted, but if you stick to your process you're going to achieve your reward."

From an Investor Advantage talk hosted by Richard C. Wilson
Flow chart of the federal estate tax calculation from gross estate to tax due, in seven numbered steps.
The federal estate tax calculation runs from the gross estate to the tax due in seven steps. See also the full chart page.

Common questions

How does reporting an incomplete gift affect the assessment period?

Reporting a transfer as incomplete does not start its gift tax assessment period, even if it later proves complete.

A later return reporting it as a completed gift with adequate disclosure can start the period, subject to the assessment qualifications above.

Conversely, adequately reporting a transfer as complete starts the period even if it later proves incomplete. These rules are subject to the disclosure regulation's effective date limits.

Once the assessment period expires for an adequately reported completed gift, estate inclusion is limited to the extent a completed gift would be included.

Can a transaction reported entirely as a nongift be adequately disclosed?

Yes, a completed transaction reported entirely as a nongift can qualify if the return or attachment provides the required information and explains why the transfer is not a gift.

Include the property and consideration description, identities and relationships, applicable trust information, and statement of contrary regulatory or revenue ruling positions described above.

Completed ordinary course business transfers to family members defined by the applicable tax statute are deemed adequately disclosed if all parties properly report them for income tax purposes, even without a gift return.

These rules are subject to the disclosure regulation's effective date limits.

How do I amend an already filed Form 709?

File another Form 709, check the amended return box, explain the changes with supporting information and attach a copy of the original return.

If you have already been notified that the return was selected for examination, send additional information directly to the examining office.

Sources

The disclosure checklist and related transfer reporting rules summarized here are subject to the regulation's effective date limits for both the gift and the return filing. Special valuation transfers have separate disclosure requirements.

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