Many people are making gifts before the end of 2012 to take advantage of the disappearing $5.12M gift tax exemption ($10.24M for a married couple).  When figuring out the maximum amount that can be given, gifts from prior years need to be included, whether or not those gifts were reported at the time.

In a recent analysis, CCA 201249015, the IRS has taken the position that the tax from prior gifts will still need to be paid, along with interest from the date the return should have been filed.  In the facts of that case, a taxpayer had made a gift which was not reported and then made further gifts several years later which were reported and which allegedly used up all of her remaining gift tax exemption.

Because the later gifts had used up all of the taxpayers exemption amount (exactly as people are doing right now!), the taxpayer actually has to pay the gift tax on the prior gifts.  And because a return was not filed for the first gift, the IRS can go after the taxpayer for the gift tax on the unreported gift at any time, with interest running the whole time.

With prior gifts occurring decades ago, the additional interest owed could dwarf the amount of the gift or estate tax intended to be saved by making that extra gift today.  It is therefore critical that the professional knows about all gifts so that they can properly calculate and advise how much can still be given this year.