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!

This blog is meant to bring fresh ideas about business value to business owners and their advisors. While our first posts have been written articles, we hope to use other media to communicate our message as well – and we plan on using video a lot more in the future.

Here’s our first video, a 90-second talk by SPARDATA president Brad Davidson on why a valuation should serve as the foundation for planning for your future.

If you would like to set up a consultation, please click here.

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