You did your research and got some advice, and you already know that you need to file a gift tax return this year. You also know that based on the value of the gifts you made, you are completely covered by either the gift tax annual exclusion or the lifetime exemption, so there will be no tax due – congratulations! Since there is no tax due, you won’t be assessed penalties and interest, so there is no need to worry about filing the return by April 15th, right?
Not so fast! There are multiple other reasons why you may need to make sure that your gift tax return gets filed timely.
One of the reasons that you should file a timely gift return is to ensure that the amount of GST (generation skipping transfer tax) exemption being applied is based on the fair market value of the gift as of the date of the gift. If you file your return late, you are no longer entitled to use the value on the date the gift was made (unless the gift qualifies under the GST automatic allocation rules). Instead, you would need to do a late GST allocation and value the gift as of the month you are filing your return for GST purposes. You could potentially be filing your gift tax return over a year after the time you made the gift. While there is a chance the value of the gift has depreciated, more often assets will appreciate in value, especially in the current market. As a result, you would need to use more of your GST exemption if you did not file on time.
Another reason you would want to file your return on time is because there are some elections that can only be made on a timely filed return. The most common of these elections is the 2632(c) election to either have a trust treated as a GST trust subject to GST automatic allocation or to opt out of GST automatic allocation. Without having one of these elections in place, you are required to review the document annually to determine if the trust meets the rules to qualify for GST automatic allocation. As these rules can be very cumbersome, this often adds additional complexity to the preparation of the return and could result in a possible undesired outcome.
Lastly, the three-year statute of limitations begins on the later of 1) the due date of the return and 2) when the return is filed. Therefore, you generally want to have your return filed as soon as possible to avoid extending the time that the Internal Revenue Service can review the return and assess gift tax.
If you find yourself in a position where you are not able to file your gift tax return by the deadline, are you able to extend the deadline? Fortunately, filing for a six-month extension is very easy. If you are already extending your Individual income tax return with Form 4868, and you do not owe gift tax, then your federal gift tax return is also automatically extended. If you are not extending your Individual income tax return, or you need to make a payment, Form 8892 should be filed to extend the gift tax return. If both spouses are filing a return, then separate extension forms should be filed for each. Additional state extensions may also be required, but currently the only state with a gift tax is Connecticut.
Please reach out if you need help with your reporting obligations.
