The Inflation Reduction Act, effective August 16, 2022, included legislation that increases IRS funding by roughly $80 billion over the next 10 years. Nearly $46 billion (69%) of the additional money will be used to improve and expand IRS enforcement efforts, specifically related to large corporations, large partnerships, and wealthy individuals. As part of this initiative, an increase in the enforcement of gift and estate tax returns is also anticipated. Over the past decade, just under 1% of total gift tax returns and roughly 10% of estate tax returns have been audited, but gift and estate taxpayers can expect an increase in the IRS scrutiny of these filings with the additional funding allocated to enforcement efforts.
The anticipated increase in IRS enforcement of gift and estate filings in the next decade will likely heighten valuation exposure as well. In many circumstances, valuations are required for gift and estate purposes, and a qualified valuator can leverage gifts through the application of valuation discounts. 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. For these valuations, it is critically important to engage a qualified appraiser early on in the planning process, as a failure to complete a proper valuation can lead to potential tax issues and exposure to IRS penalties.
It should be noted that IRS audit rates are not expected to increase for those earning less than $400,000 a year. However, regardless of income level, proper valuations allow taxpayers to plan strategically for the future since gift and estate planning strategies help individuals maximize their long-term financial success. For gift purposes, the annual exclusion and lifetime exemption are two planning strategies taxpayers should be familiar with. Individuals can avoid filing a gift tax return if the gift is less than the annual exclusion amount, and taypayers are not required to pay gift taxes if their total lifetime gifts do not exceed the lifetime exemption limit. As the IRS increases enforcement surrounding gift and estate filings, taxpayers should work closely with valuation professionals to ensure proper navigation of these complexities.
If you and your advisors need assistance with gift or estate valuations, please reach out to the GYF Business Valuation Group at 412-338-9300.
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