Gifting is expected to grow in popularity, along with anticipation that the IRS will improperly pursue “strict compliance” with its disclosure requirements.

In previous issues we have warned that, if Congress does not act, after 2025 the estate tax exemption will drop from $13.6 million per person to just $6.2 million (i.e., $5 million adjusted for inflation). As a consequence, one’s seemingly modest estate, which up to this point has not warranted estate tax planning, could become subject to taxation after their death.

The looming possibility of estate tax liability in the future, where none exists now, makes discussions of estate tax strategies a timely exercise.

Many people will reduce their taxable estate by ramping up their yearly practice of making gifts to children, grandchildren, charities, etc., within the $18,000 gift limit (for 2024) per donor per recipient. (See our article, “

Gifting: As Simple as Writing a Check

.”) If you restrict the value of each gift to the annual limit (or less), you should expect no problems from the IRS.

But what happens if you exceed the limit? That’s when you, with the help of your tax professional, will need to pay close attention to the rules.

Adequate Disclosure.

If you make a gift of more than the limit that was in effect for the year in which the gift is made (e.g., $18,000 in 2024), you must file a gift tax return (Form 709). The IRS then has a three-year window, from the filing date of the tax return, during which it can assess tax.

However, if you make a taxable gift but don’t file a Form 709, or you do file the form but don’t adequately describe the gift, the three-year window becomes an open-ended time period for the IRS to calculate and assess your tax liability.

To preserve your three-year window, you must provide to the IRS “adequate disclosure” of your gift. The IRS regulations state that a gift has been adequately disclosed if, on your Form 709, you:

  • accurately describe the gift and any consideration you received in return;
  • identify the recipient of the gift and your relationship to them;
  • in cases where the transfer is in trust, disclose the trust’s tax ID number and a brief description of the trust’s terms;
  • for gifts of assets other than cash, describe the valuation method or attach a qualified appraisal; and
  • provide a description of any position that is contrary to the regulations that were in effect at the time you made the gift.

In 2023, the U.S. Tax Court issued a taxpayer-friendly ruling, in Schlapper vs. Commissioner, that rejected the IRS’s tax assessment after finding that the taxpayer had “substantially complied” with the adequate disclosure requirements.

Nonetheless, many tax experts anticipate that, if major gifting grows in popularity to lower the taxable value of wealthy estates, the IRS will disregard the substantial compliance standard, instead pursue “strict” compliance, and resort to nit-picking of the five requirements listed above.

If you anticipate making gifts, in this or future years, that could be construed as exceeding the gift limit in effect at that time, be sure to check with your professional advisors to ensure that you achieve adequate disclosure and avoid the IRS’s stepped-up collection efforts.