Avoid The Gift Tax Return Trap (2024)

FAQs

How does the IRS know if you gifted money? ›

The primary way the IRS becomes aware of gifts is when you report them on form 709. You are required to report gifts to an individual over $17,000 on this form. This is how the IRS will generally become aware of a gift. However, form 709 is not the only way the IRS will know about a gift.

A penalty is usually charged if your Form 709 is filed after the due date (including extensions). It is usually 5% of the tax not paid by the original due date for each month or part of a month your return is late. The maximum penalty is 25%. You might not owe the penalty if you have reasonable cause for filing late.

Over the past decade, just under 1% of total gift tax returns and roughly 10% of estate tax returns have been audited, but gift and estate taxpayers can expect an increase in the IRS scrutiny of these filings with the additional funding allocated to enforcement efforts.

Annual gift tax exclusion

The gift tax limit is $17,000 in 2023 and $18,000 in 2024. Note that this annual exclusion is per gift recipient. So you could give away the limit to several different people in a single year and still not have to file a gift tax return and possibly pay the gift tax.

Do you need to file a gift tax return? If you make a taxable gift (one in excess of the annual exclusion), you are required to file Form 709: US Gift (and Generation-Skipping Transfer) Tax Return.

A gift tax is a government tax imposed on those who give money or property to others in exchange for nothing (or less than total value). There is typically a tax-free gift limit to family members until a donation exceeds $15,000 (jumping up to $16,000 in 2022). In these instances, the IRS is usually uninvolved.

Gift Tax Return Statute of Limitations

In general, IRC 6501(a) requires the IRS to assess a gift tax liability within three years after the filing date (or due date of the gift tax return, whichever is later).

If you fail to file this form, the IRS can find out via an audit. If they do not find out during your lifetime, they could find out during an audit of your estate, and then hit your estate with penalties and interest that accrued from when the gift tax return should have been filed.

What happens if I don't declare the gifts? As an Executor is personally liable, it is vital that they make the necessary enquiries into lifetime gifts. HMRC can impose financial penalties when gifts are not declared correctly and the Executors may be liable to pay these penalties themselves.

Owning a small business such as auto dealership, a restaurant, a beauty salon, a car service or cannabis dispensary is an IRS red flag, as they typically have many cash transactions. Red flags are also raised on outliers – businesses with margins that are too low or too high.

How does the IRS find out about unreported gifts? ›

But the IRS also can search for unreported gifts during your lifetime. For example, it searches public property records in some states, such as real estate title records. Transfers that appear to be between relatives or that were made without compensation can be compared to filed gift tax returns.

The Internal Revenue Service may allow expense reconstruction, enabling taxpayers to verify taxes with other information. But the commission will not prosecute you for losing receipts. The IRS may disallow deductions for items or services without receipts or only allow a minimum, even after invoking the Cohan rule.

Filing Form 709: First, the IRS primarily finds out about gifts if you report them using Form 709. As a requirement, gifts exceeding $15,000 must be reported on this form.

Generally, the answer to “do I have to pay taxes on a gift?” is this: the person receiving a gift typically does not have to pay gift tax. The giver, however, will generally file a gift tax return when the gift exceeds the annual gift tax exclusion amount, which is $17,000 per recipient for 2023.

The annual gift tax exclusion is a set dollar amount that you may give someone without needing to report it to the IRS. The threshold is typically adjusted to account for inflation each year. The IRS announced that the annual gift tax exclusion will be $18,000 in 2024, up from $17,000 in 2023.

If you don't file the gift tax return as you should, you could be responsible for the amount of gift tax due as well as 5% of the amount of that gift for every month that the return is past due.

Generally, the answer to “do I have to pay taxes on a gift?” is this: the person receiving a gift typically does not have to pay gift tax. The giver, however, will generally file a gift tax return when the gift exceeds the annual gift tax exclusion amount, which is $17,000 per recipient for 2023.

A gift letter is a statement that ensures your lender the money that came into your account is a gift and not a loan. The person who gave you the money must write and sign the gift letter as well as provide their personal information.