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Gift and Estate Taxes and The IRS

Luvara Law Group LLC Feb. 20, 2024

IRS funding for the enforcement and collection of delinquent taxes was a significant part of the Inflation Reduction Act enacted in 2022.  Included in the legislation was an appropriation of more than $45 billion that will be used to improve and expand IRS enforcement efforts, that is targeted specifically toward large corporations, large partnerships, and wealthy individuals. IRS audit rates are not expected to increase for those earning less than $400,000 a year. Notwithstanding consideration of the income level, essential valuations should allow taxpayers to strategically plan for the future since gift and estate planning strategies help individuals maximize their long-term financial success.

Part of this initiative, an increase in the enforcement of gift and estate tax returns. Gift and estate taxpayers can expect an increase in the IRS scrutiny with the additional funding allocated to enforcement efforts since during the past 10 years under 1% of total gift tax returns and approximately 10% of estate tax returns have been audited. This renewed focus will likely heighten valuation exposure since in many circumstances, valuations are required for gift and estate purposes, and a qualified valuator can leverage gifts through the application of various discounts.

For example, the value of a gift is determined at fair market value as of the date of the gift. For estate purposes, a fair market value is determined as of the date of the decedent’s death, or in some scenarios, an alternate date six months after the date of death. In some situations, such as with the business owned by the decedent, valuations are critically important and may require the engaging a qualified appraiser sine a failure to complete a proper valuation may lead to potential tax issues and exposure to IRS penalties.

As the IRS increases enforcement surrounding gift and estate filings, taxpayers should work closely with valuation professionals to ensure proper navigation of these complexities. For gift purposes, the annual exclusion and lifetime exemption are two planning strategies taxpayers should familiarize themselves with. In addition, individuals can avoid filing a gift tax return if the gift is less than the annual exclusion amount set by the IRS. For larger estates considerations, taxpayers are not required to pay gift taxes if their total lifetime gifts does not exceed the lifetime exemption limit.