The Service has recently issued two memoranda, IRS SBSE Memorandum, SBSE-04-1211-101 and IRS SBSE Memorandum, SBSE-04-1211-103, to provide interim guidance for the Internal Revenue Manual concerning Gift Tax Examinations, specifically providing guidance concerning identifying prior previously undisclosed gifts.

Will an Audit of One Gift Tax Return Lead to an Audit of All Gift Tax Returns?

Memorandum 103 states that the examiner is now responsible for requesting a transcript of all prior gift tax returns that the taxpayer has filed with the IRS, and for obtaining copies of all such returns from the Service Center where the return was filed, from the C-Site in Kansas City, Missouri, prior to starting the examination, or from the taxpayer once the examination has commenced.  The examiner is then to determine the statute of limitations for each gift tax return, and to “probe for undisclosed transfers.” These new IRM instructions would seem to lead to audit of all of the taxpayer’s gift tax returns on the selection for audit of any of the taxpayer’s gift tax returns.

When Does the Statute of Limitations Start to Run?

Memorandum 101 discusses the gift tax statute of limitations in estate and gift tax examinations.  The general rule set out in IRC Section 6501(a) provides a three-year statute of limitations.  However, for gifts made after December 31, 1996, as a result of the enactment of IRC Section 6501(c)(9), if a gift is not adequately disclosed on the Return, (either omitted entirely or a Return does not apprise the IRS of the nature of the gift) the statute of limitations does not begin to run and the gift tax may be assessed at any time with respect to the gift, even if the statute of limitations has run on the Return filed for the year the gift was made.  If the statute of limitations has not yet run on the Return filed on which there was an omitted gift or an inadequately disclosed gift, the examiner will seek the taxpayer’s consent to extend the statute of limitations on the entire Return, but if unable to obtain such consent to an extension, the examiner may allow the three-year statute to run on the Return, and proceed with an examination and gift tax assessment for the undisclosed or inadequately disclosed gift.