The Statute of Limitations & Adequate Disclosure
For estate planners, the most dangerous risk isn't necessarily an immediate audit—it is the unlimited statute of limitations.
by Bruce Johnson, ASA
1. The Core Problem: The “Unlimited Lookback”
Under IRC § 6501(c)(9), if a gift is not “adequately disclosed,” the IRS may assess tax, penalties, and interest at any time in the future—even decades later. Until recently, the prevailing fear was that anything less than Strict Compliance with the adequate disclosure regulations kept the statute open indefinitely.
2. Schlapper V. Commissioner, T.C. Memo. 2023-65
A taxpayer gifted a $6M offshore insurance policy but mistakenly reported it as a gift of corporate stock. He cited the wrong year (2006 vs. 2007), failed to attach a formal appraisal, and failed to identify all donees.
The IRS Argument: The Service argued the statute of limitations never started because the disclosure failed to strictly comply with Treas. Reg. § 301.6501(c)-1(f)(2).
The Result: Taxpayer Win. The Tax Court rejected the strict compliance standard. It held that the taxpayer “Substantially Complied” because the disclosure—despite its errors—was sufficient to alert the IRS to the nature of the transaction. So we have moved from “Strict Compliance” regime to a “Substantial Compliance” safety net.
3. The “Safe Harbor” Checklist (Treas. Reg. § 301.6501(c)-1(f)(2))
While Schlapfer provides a defense for past errors, the Court provided a list of 5 items that must be included to trigger the 3-year statute of limitations immediately upon filing.
- Detailed Description: A clear description of the transferred property and any consideration received.
- Parties Identified: The identity of, and relationship between, the transferor and each transferee.
- Trust Details: If applicable, the Trust EIN and a brief description of terms (or a copy of the instrument).
- Contrary Positions: A statement describing any position taken that is contrary to Treasury regulations.
- Appraisal: A detailed description of the method used to determine Fair Market Value (FMV).
While Schlapfer provides a defense for past errors, tax professionals should not rely on the grace shown by the Court in this case. Rather, submitting a tax return supported by a qualified business appraisal will start the statute of limitations and not leave it to chance.
Written by Bruce Johnson
