Under the tax code, gift tax returns (Form 709) must be filed for most transfers. However, if a transfer is covered by the $11,000 annual exclusion, no gift tax return is required. In some cases, though, it pays to file a gift tax return even for $11,000 gifts. After such a return is filed, with all transfers adequately disclosed, the IRS has three years to raise questions. After three years, no further challenge is permitted. In reality, the IRS is unlikely to devote personnel to examining $11,000 gift tax returns, preferring to focus on larger gifts and bequests.
On the other hand, if you don’t file a gift tax return, there is no statute of limitations. The IRS could audit your estate tax return, decades afterwards, and ask your executor to justify the value placed on a 2003 transfer. Failure to sustain the value could lead to an assessment for taxes, interest, and penalties.
