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Irrevocable life insurance trusts can allow the trustee to make distributions to the beneficiaries. These distributions are considered gifts that are tax-free for the beneficiaries. As the trustee, you are responsible for filing the gift tax return and paying the taxes. You report the gift amount and calculate the tax liability using Internal Revenue Service Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. You must file a gift tax return for each calendar year you make a gift to the beneficiaries. If you miss the filing deadline, the IRS can charge interest and penalties based on the unpaid tax amount.
You must file Form 709 in the calendar year following the year when you made the gift. For example, if you made the gift in 2013, you file Form 709 in 2014. The return must be filed and postmarked by April 15 for the IRS to accept your return as timely filed. You can get an automatic extension of time if you filed an extension for your personal tax return. Alternatively, you can file Form 8892 to get a six-month filing extension, making the return due on Oct. 15 of that year.
Calculate Penalties and Interest
If you miss the filing deadline, the IRS imposes a late filing penalty and interest starting on the first day after Form 709 was due. At the time of publication, the IRS charges a 5 percent penalty on the unpaid tax balance each month. The penalty amount is either $100 or 100 percent of the penalty amount, whichever is lower. The maximum yearly penalty is 25 percent of the tax amount. In addition, the IRS will tack on interest to the outstanding balance.
File the Late Return
Use a tracking service to verify the date when you mailed the gift tax return. If you mailed it from a U.S. Postal Service location, send the return via certified mail or registered mail. The IRS accepts tax returns sent by a private carrier such as UPS or FedEx. Both of these shippers provide a receipt showing when the return was mailed and a number to track the return. Keep the receipt in a safe place in case the IRS disputes the filing date.
Abate the Penalty
If the IRS sends you a penalty notice after receiving Form 709, you may be able to abate the late filing penalty. You must convince the IRS that you had a good reason for missing the filing deadline. Some reasons the IRS considers good cause are if you had a medical condition, if a loved one died or if you spent a substantial amount of time caring for a relative. You must include a written statement with the tax return and provide proof to substantiate your claim.
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