Estate and Gift Tax Returns and Record-Keeping Requirements

Gift Tax Returns – The same general rules applicable to income tax returns apply to annual gift tax returns. That is, a 3-year statute of limitations applies to the initiation of an audit. The IRS has issued regulations describing substantiation requirements to ensure the protection of the statute of limitations for gift tax purposes. At this time, we have no cases or rulings on these new requirements. It is possible that the IRS could challenge the substantiation or appraisal information on gift tax returns many years after the expiration of the statute of limitations. The challenge will be based on the adequacy of the substantiation provided with the initial return and will most likely occur when the donor’s estate is audited. Our recommendation at this time is that all records, such as valuation reports, bank records, and any other items substantiating a gift tax return, should be kept until the donor’s estate tax return is settled.

Estate Tax Returns – The statute of limitations is, again, 3 years from the date the return is filed. However, in many cases, the estate tax return is extended by 5 months beyond the normal due date of 9 months following the date of the decedent’s income tax returns as long as the estate is open. These income tax returns will also have a 3-year statute of limitations. A good rule of thumb is to keep the estate records for 5 years after the decedent’s death or until a final closing agreement is reached with the IRS, if later.

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