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Interest owed on an unpaid gift tax liability begins to accrue from the due date of the gift tax return relating to the unpaid tax.

Interest on Unpaid Gift Tax Begins at Due Date of Return

  • 12/19/2012

Interest on Unpaid Gift Tax Begins at Due Date of Return

The IRS chief counsel has concluded that interest owed on an unpaid gift tax liability begins to accrue from the due date of the gift tax return relating to the unpaid tax. The IRS exam function had asked whether interest should accrue from the date of a gift tax return filed for a later gift.

CCH Take Away: Although the IRS failed to assess unpaid gift tax against the taxpayer within three years, here the IRS was entitled to assess the tax at any time because the taxpayer never filed a gift tax return disclosing the gift.

Background

In year one, the taxpayer made a gift of a one-half interest in real property. The taxpayer did not file a gift tax return for this gift. Had she reported the gift, she could have used part of the gift tax credit.

In year two, the taxpayer made additional gifts. She reported the gifts on a gift tax return and claimed the entire unified credit of $345,800. The assessment statute of limitations expired for the year two gift.

Comment: Because the assessment period had expired for the year two gift, the IRS did not want to reallocate the unified credit to the year one gift, because this would have generated a year two gift tax liability that the IRS could not assess.

The taxpayer’s estate later disclosed the year one gift. The IRS will assess gift tax on the year one gift; the IRS exam function then asked when the running of interest begins on the unpaid gift tax liability.

Analysis

Code Sec. 2501 imposes gift tax. The taxpayer can claim a unified gift tax credit, but the credit must be reduced by the sum of the credits allowed under Code Sec. 2505 for all preceding years. Applying the Code Sec. 2505 credit is mandatory.

The taxpayer should have reported the year one gift and used a portion of the unified credit to eliminate her gift tax liability. Then, when the taxpayer reported her year two gifts, she should have used the remainder of the unified credit and paid the remaining gift tax liability.

The position of the IRS is that the available credit for an unreported gift must be reduced when the credit is used in a subsequent year for a reported gift. Since the taxpayer used the entire unified credit for the year two gift, there was no unused credit available for the unreported year one gift. Thus, gift tax may be assessed for year one.

Interest due

If tax is not paid, interest is due from the last date prescribed for payment of the tax until the date that payment is received. Gift tax is generally due when the gift tax return is due (ignoring any extension). The IRS chief counsel concluded that underpayment interest will run on the assessed year one deficiency from the due date of the year one gift tax return.

Comment: Chief counsel indicated there was no other logical starting date. The deficiency arose in year one, since the taxpayer used up the entire credit in later years.

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