If you give a gift and the fair market value exceeds $13,000 as of the 2012 tax year (rising to $14,000 in 2013), you must file a gift tax return. You must file the return between Jan. 1 and April 15 in the calendar year you made the gift. If you cannot meet the deadline, you can get an additional six-month extension of time by filing Form 8892, Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax. If you miss the deadline, you run the risk of the IRS contacting you about the unfiled return.
Gift Tax/Unified Credits
You do not necessarily have to worry about filing a return because you might owe gift tax. Under IRS regulations, the first $13,000 of any gift you make to one person in a calendar year is tax-free, as of 2012. If your gift exceeds the $13,000 cap, you can use your unified credit to offset the remaining gift amount. For the 2012 tax year, the unified credit is $5.12 million (rising to $5.25 million in 2013). The unified credit is reduced by the amount the gift exceeds the $14,000 gift tax exemption. You also don't need to report gifts of any size to a spouse.
No Gift Tax Due
The IRS bases its penalties on the unpaid tax amount. If no tax is due, there is no penalty for not filing a gift tax return. However, not filing a return could come back to haunt your heirs. If your estate uses the unified credit for gifts you made while living, the IRS will look for the gift tax return. If you did not file, the estate could be liable for any unpaid gift tax plus the non-filing fees, penalties and interest.
Penalty for Late Filing
If you owe gift tax and do not file a return, the monthly penalty starts the day after the return was due. The IRS will assess a 5 percent monthly penalty on the unpaid tax until you file the return and pay the tax. The penalty is capped at 25 percent of the net tax amount. If you do not file the return for 60 or more days, the penalty is the lesser of $100 or 100 percent of the unpaid tax amount.
Additional Fraud Penalty
If the IRS decides the reason you did not file was to avoid paying taxes, an additional fraud penalty of 15 percent is assessed per month. The fraud penalty is capped at 75 percent of the net tax due.
Penalty for Gift Underreporting
If the gift’s fair market value is significantly undervalued on the tax return, the IRS will assess an under-reporting penalty. A 20 percent penalty is imposed if the gift is undervalued by 50 percent or more and the tax underpayment is greater than $5,000. A 40 percent penalty is imposed if the gift is undervalued by 75 percent or more and the tax underpayment exceeds $5,000. The IRS charges interest from the first day the tax return was due until all taxes and penalties are paid in full.
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