The Inflation Reduction Act of 2022 was signed into law on Aug. 16. This new law’s provisions — along with the forthcoming sunset of the gift tax exemption levels that were part of the 2017 tax reform law — make this an attractive time for high net worth clients to consider making large gifts.
Do you have wealthy clients who have not yet used their lifetime exemption amounts? The amount that an individual can give away tax free is currently $12.03 million, and that amount is scheduled to be cut in half on Jan. 1, 2026. A married couple can therefore give away $24.06 million, gift tax free, this year. Clients worth well above those amounts should engage in discussions with their advisors as to whether they should make a large gift to use the temporarily large exemption before it changes.
Increased IRS enforcement aimed at wealthy taxpayers. The Inflation Reduction Act’s goals include combating climate change, bolstering American energy production, reforming Medicare drug pricing and reducing the deficit. The new law also provides $80 billion of new funding to the IRS — funding specifically designated for improved enforcement.
Including this provision in the law is actually a revenue raiser, as officials expect this investment in the IRS to increase tax revenues by $124 billion. It is expected that the funds will be used for an increased focus on audits of wealthy tax filers with complex returns. Treasury Secretary Janet Yellen also confirmed that the new IRS funding will be used only to increase audits for taxpayers making more than $400,000 per year.
The IRS has several years to audit a return. It will take the IRS several years to hire and train the new auditors. However, the IRS also has several years to audit a taxpayer’s gift tax return. The time limit for the IRS to audit a return is called the statute of limitations and is generally three years from the date the return is due. For a gift made in 2022, the gift tax return is due on April 15, 2023, meaning that the IRS has until at least April 14, 2026, to initiate an audit.
The three-year statute of limitations applies only if the taxpayer makes an “adequate disclosure” of the gift on the gift tax return. There is an entire set of rules relating to what constitutes an adequate disclosure. If the taxpayer does not adequately disclose their gifting transaction on the return, the statute of limitations might not run at all and the IRS could have an unlimited amount of time to audit the return.
Clients who want to use the large exemption should make a gift sooner rather than later. If clients wait until the last minute and make their large gifts in 2025, the statute of limitations will not run on their gift tax returns until April 2029. This gives the IRS more than six years to hire and train new auditors who are focused on wealthy individuals. Meanwhile, as explained previously, clients who make a large gift this year will give the IRS only three years to hire and train the new personnel. Therefore, clients should strongly consider moving forward with a gift this year, and make sure a tax advisor properly trained in the “adequate disclosure” rules completes the gift tax return to ensure the statute of limitations runs as soon as possible.
Clients who are taking valuation discounts on their gifts are especially encouraged to complete those transactions as soon as possible, as valuation disputes are among the most common fights between taxpayers and the IRS in the gift tax world.
Jon Whitacre, JD, CLU, ChFC, is director, advanced sales, Crump Life Insurance Services. He may be contacted at [email protected].