A recent article from Paul Hood of Leimberg Information Services keenly identifies the danger in withholding gift tax information from the I.R.S. If on a tax return the gift is not “adequately disclosed”, the IRS is free to assess the tax at any time after the fact – without fear of falling outside the statute of limitations. In the case noted by Hood, the taxpayer listed the value of the stock in a closely-held business without noting where that number came from or detailing how discounts were applied.

Keeping key information like this out of the tax return can be a big red flag. Hood states:

This ruling underscores the importance of including a full-blown appraisal report with a gift tax return.  At one time, there was a minimalist school that preferred to disclose as little as possible with a tax return.  Since the enactment of IRC Sec. 6501(c)(9), this strategy should not be employed at all.

Problems can come in the form of failure-to-file penalties, significant accrued interest, or moving the estate into a higher estate tax bracket. Getting an IRS-compliant business valuation not only gives you a precise and defensible value for your closely-held stock, it saves you from a painful and arduous encounter with the tax authorities. As Hood says, “it PAYS to disclose, disclose, disclose. I think that you ought to drown the IRS in paper with a gift tax return, but that’s just me.”  We couldn’t agree more!

LISI Estate Planning Newsletter #1694 (September 1, 2010) at http://www.leimbergservices.com.  Copyright 2010 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.