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Tax Question of the Week: Do I Need Professional Appraisals of my Non-cash Gifts?

February 11, 2014

When making a substantial non-cash gift a professional appraisal can reduce the likelihood of the IRS challenging your gift tax return.

To lower your chances of an unplanned tax liability when making a substantial noncash gift a professional appraisal can reduce the likelihood of the IRS challenging your gift tax return.

3-year statute of limitations

If you make a substantial noncash gift — either outright or in trust — IRS regulations provide for a three-year statute of limitations during which the IRS can challenge the value you report on your gift tax return. After the three-year period expires, you can enjoy the peace of mind that comes with knowing that your estate plan will work as you intended.

However, there is a catch: The statute of limitations doesn’t begin until your gift is “adequately disclosed” on a gift tax return. According to the IRS, to adequately disclose a gift, you must provide:

  • A detailed description of the nature of the gift
  • The relationship of the parties to the transaction
  • The basis for the appraisal
  • You may also be required to furnish certain financial statements or other financial data and documents

You can satisfy the adequate disclosure rule’s information requirements by submitting an appraisal report by a qualified, independent appraiser that includes details about the property, the transaction and the appraisal process. In most cases, this is the most effective way to ensure that you’ve disclosed gifts adequately and triggered the statute of limitations. Even if a gift’s value falls under the $14,000 annual exclusion and thus won’t be taxable, it is generally a good idea to file a gift tax return to trigger the statute of limitations.

Misstatement penalties can add up

If for some reason an insufficient appraisal is conducted it puts you at risk for penalties and additional taxes from the IRS if they find out that the property was substantially or grossly misstated.
A “substantial” misstatement occurs when you report a value that is 65% or less of the “correct” value. A “gross” misstatement occurs when you report a value that is 40% or less of the correct value. The penalty for a substantial misstatement is 20% of the amount by which your taxes are underpaid. Gross misstatements result in a 40% penalty.

Appraise your assets

Reduce your chances of triggering an IRS review of your gift tax return by having a member of the Tax Services Team value your substantial noncash gifts at the time of the transaction. Email trustedadvisors@kahnlitwin.com or call 401-274-2001 for help with a variety of other estate planning strategies that require having accurate, supportable and well-documented appraisals of assets.

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