Preliminary Work and Taxpayer Data · Preliminary work to prepare tax returns

Additional required returns filed and taxes paid

Verification 2026 Verified
tax year · reviewed 2026-08-19 · Draft for I. Ohu review

The individual income tax return is often not the only filing a client owes for the year, and the other filings are the ones that go wrong. They have separate deadlines, separate penalties, and — the reason they get missed — no arithmetic connection to the return you are preparing, so nothing in the computation ever points back at them. An intake interview that only asks about income will find none of them.

The rule

Gift tax returns turn on the transfer, not on the tax. Any individual who in a calendar year makes any transfer by gift must file a return, except a transfer excluded under § 2503(b) or (e), a transfer for which a § 2523 marital deduction is allowed, and certain complete charitable transfers under § 2522 (IRC § 6019). Two consequences follow that clients rarely anticipate. First, the § 2503(b) exclusion covers only present interests, so a gift of a future interest is reportable no matter how small. Second, the return requirement is independent of whether any tax is due: with the basic exclusion amount where it now stands, almost no individual client will owe gift tax, and many will still have to file.

Domestic service employment taxes are an individual filing. Returns for domestic service employment taxes are made on a calendar year basis and filed by the 15th day of the fourth month following the close of the employer’s taxable year beginning in that year, with no deposit requirement (IRC § 3510(a)). In practice that means Schedule H with the Form 1040. The sting is in the next subsection: solely for § 6654 purposes, domestic service employment taxes are treated as a tax imposed by chapter 2 for the employer’s taxable year (IRC § 3510(b)(1)) — so hiring a household employee can create an estimated tax underpayment on the individual return. The exception in § 3510(b)(2) spares an employer who has no § 31 wage withholding credit and would face no § 6654 addition anyway.

International information returns carry penalties out of proportion to the tax. Failure to furnish the information required about certain foreign corporations and partnerships costs a fixed amount for each annual accounting period, with a continuation penalty running from 90 days after the Service mails notice, subject to a cap (IRC § 6038(b)(1), (2)) — and separately reduces foreign tax credits (IRC § 6038(c)). Failure to file the notices and returns required for certain foreign trusts is penalised at the greater of a fixed amount or a percentage of the gross reportable amount (IRC § 6677(a)), which is what makes it the most dangerous of the group. Receipt of large gifts from foreign persons is separately reportable above an annually adjusted threshold (IRC § 6039F).

Ordinary information returns have their own two-sided penalty. Failing to file a correct information return is penalised per return, at reduced amounts where the failure is corrected within 30 days or by 1 August, with annual caps that differ according to the filer’s average gross receipts (IRC § 6721(a), (b), (d)). Intentional disregard removes the cap and substitutes a much larger figure or a percentage of the amounts that should have been reported (IRC § 6721(e)(2)). The parallel penalty for failing to furnish a correct payee statement is separate and cumulative (IRC § 6722), so one omitted form can be penalised twice.

Current figures

Item	2026
Gift tax annual exclusion	the first $19,000 of gifts to any person, other than gifts of future interests, which are never covered however small^TY2026
Gifts to a non-citizen spouse	$194,000 of gifts to a spouse who is not a United States citizen, again excluding future interests^TY2026
Reportable gifts from foreign persons	aggregate gifts from certain foreign persons above $20,573 received in the taxable year^TY2026
Household employee social security and Medicare threshold	$3,000 of cash wages paid to any one household employee in 2026 — the IRC § 3121(x) applicable dollar threshold as adjusted by the Commissioner of Social Security and rounded down to a multiple of $100^TY2026
Household employee unemployment tax	more than $1,000 of cash wages to household employees in any calendar quarter of the year or the prior year triggers federal unemployment tax on the first $7,000 of cash wages per employee, at 6 percent less a credit of up to 5.4 percent for state unemployment contributions — a net 0.6 percent, paid by the employer and never withheld^TY2026
Information return penalty	$340 per return, reduced to $60 if corrected within 30 days and $130 if corrected by 1 August, with annual caps that differ by the filer's gross receipts — the amounts for returns required to be filed in 2027^TY2026
Foreign corporation and partnership reporting penalty	$10,000 for each annual accounting period, plus a further $10,000 for each 30-day period beginning 90 days after the Service mails notice, capped at $50,000 of continuation penalty^TY2026
Foreign trust reporting penalty	the greater of $10,000 or 35 percent of the gross reportable amount, with a further penalty if the failure continues more than 90 days after notice^TY2026

How it works in practice

Ask the questions that surface obligations rather than the obligations themselves. “Did you pay anyone to work in or around your home” finds the household employee. “Did you give anyone anything substantial, or put anyone on the title to anything” finds the gift — the second half of that question matters, because adding an adult child to a deed or a brokerage account is a transfer clients never describe as a gift. “Do you have any interest in a business, trust or account outside the United States, however small” finds the international group.

For a household employee the sequence is: determine employee status first, then test the cash wage threshold for social security and Medicare, then test the quarterly threshold for unemployment tax separately, because the two use different measures and one can apply without the other. Then, because of § 3510(b)(1), revisit the client’s estimated tax position for the year — this is the step most often skipped, and it converts a payroll question into a penalty on the income tax return.

For gifts, decide the filing question before the valuation question. Whether a return is due is settled by § 6019 and turns on the character of the transfer; how much tax is due, if any, comes afterwards. Gift-splitting between spouses is itself a reason to file, because the election is made on the return.

For the international returns, the working rule is that the penalties are not proportionate to the tax, so a client with a small foreign interest and no foreign income can still face a substantial exposure. Where a foreign trust is involved the § 6677 percentage makes early advice worth more than anything you will do on the Form 1040 itself.

The name added to the deed

Lorena added her adult son as a joint owner of her home in March. She describes it as estate planning, not a gift, and there is no tax to pay because her lifetime exclusion is nowhere near used.

She has to file. IRC § 6019 requires a return from any individual who in a calendar year makes any transfer by gift, subject only to the listed exceptions, and a transfer of an interest in real property worth far more than the annual exclusion is not within them. That no tax is due is beside the point — the exclusion is applied on the return, not instead of it.

The follow-up is about basis rather than filing. What the son receives by gift takes a carryover basis rather than the stepped-up basis he would have taken at her death, so the transfer she made to simplify her estate may have cost him more than it saved.

The nanny and the underpayment

Ravi and Simone paid a nanny $22,000 in cash wages during the year. They have no other employees, both draw salaries with ordinary withholding, and they made no estimated payments.

Two filings and one surprise. The cash wages exceed the annual threshold, so social security and Medicare apply to all of them, and quarterly wages above the unemployment threshold bring federal unemployment tax on the first tranche of wages. Both are reported on Schedule H with their Form 1040 under IRC § 3510(a), with no deposits required during the year.

The surprise is § 3510(b)(1): for IRC § 6654 purposes those taxes are treated as a tax imposed by chapter 2 for their taxable year. Their withholding was calibrated to their salaries alone, so the household taxes are an underpayment running from each installment date. Adjusting withholding for the rest of the year is the cheapest fix, because IRC § 6654(g)(1) spreads the § 31 credit across the installment dates.

The inheritance from abroad

Bruno, a United States citizen, received the equivalent of $340,000 from his late aunt’s estate in Brazil. The money is not income to him and he assumes nothing needs to be filed.

He is right about the income and wrong about the filing. A bequest is excluded from gross income by IRC § 102(a), but IRC § 6039F separately requires a recipient to report gifts and bequests from certain foreign persons above an annually adjusted aggregate threshold, and $340,000 is far above it. The report is informational; it produces no tax.

Two further questions belong in the same conversation. If the funds sat in a foreign account before transfer, foreign account reporting may be triggered. And if the estate is administered through a foreign trust, IRC § 6048 and the § 6677 penalty come into view — a percentage of the gross reportable amount, which on this sum is not a small number.

Traps

A gift tax return can be required with no tax due. IRC § 6019 turns on the transfer; the exclusion is claimed on the return.
Future interests are never covered by the annual exclusion, so a gift of one is reportable however small (IRC § 2503(b), applying to present interests).
The unlimited marital deduction is disallowed entirely for a non-citizen spouse. IRC § 2523(i)(1) denies the deduction and § 2523(i)(2) substitutes an enlarged annual exclusion in its place — a different mechanism from a capped deduction, and a much smaller shelter.
Gift-splitting requires a return because the election is made on it.
The two household employment thresholds are different tests — an annual cash wage figure per employee for social security and Medicare, a quarterly aggregate for unemployment tax — and one can apply without the other.
Household employment taxes feed IRC § 6654 (IRC § 3510(b)(1)), so they can create an estimated tax penalty on the income tax return.
No deposits are required for domestic service employment taxes (IRC § 3510(a)(3)), which is why the liability accumulates unnoticed.
IRC § 6038 has two penalties, not one — the dollar penalty in subsection (b) and the foreign tax credit reduction in subsection (c).
The foreign trust penalty is a percentage of the gross reportable amount (IRC § 6677(a)), so it is unbounded by the tax at stake.
IRC § 6721 and § 6722 are separate and cumulative — one omitted form can be penalised as both a filing failure and a payee statement failure.

How this has changed

The structure here is stable; what moves is the figures, and they move in two different ways that are easy to conflate. The gift exclusions, the foreign gift reporting threshold and the information return penalties are adjusted annually by revenue procedure. The § 6038 and § 6677 penalties are not — they are fixed in the statute, which is why a source stating them can be old and still right, while a source stating the § 6721 amounts is right only for one filing year.

The § 6721 amounts carry a second trap of their own. They are published by reference to the year in which the return is required to be filed, not the year the payments were made, so the figures that apply to 2026 payments are those announced for returns filed in 2027. A page or a question that pairs a tax year with the penalty amounts announced for that same year has them off by one.

The one substantive change worth carrying forward is on the estate and gift side generally: the basic exclusion amount was increased by Pub. L. 119-21 § 70106, which is what pushes still more clients into the position of filing a gift tax return while owing nothing at all.

Exam focus

The reliable question is whether a return is required, not how much tax is owed. Answer it from § 6019 for gifts and from the two separate household employment thresholds for domestic employees, and be ready to say that a filing requirement can exist with no liability.

Know the § 3510 pair: calendar year reporting with no deposits, and the § 6654 treatment that makes household employment taxes an estimated tax problem.

For the international returns, know which penalty is fixed and which is a percentage. The § 6677 percentage of the gross reportable amount is the distinguishing feature of the foreign trust rules and the most examinable point in the group.

Check yourself

1. A client gives their daughter an interest in a family partnership that will not become possessory for ten years. The interest is worth $4,000. Is a gift tax return required?

Answer: yes. The IRC § 2503(b) annual exclusion applies only to gifts of present interests, so a gift of a future interest is not within the § 6019 exception however small it is. The return is required even though the value is well below the annual exclusion figure.

2. A couple paid a housekeeper $2,600 in cash wages for the year, spread evenly across the four quarters. What employment filings arise?

Answer: none of the two main ones, but the tests must be run separately. The annual cash wage figure is below the social security and Medicare threshold, so no FICA applies. Quarterly wages of roughly $650 are below the unemployment tax threshold of more than $1,000 in any calendar quarter, so no FUTA applies either. Had the same total been paid in a single quarter, FUTA would have applied while FICA still would not.

3. Why can hiring a household employee produce a penalty on the individual income tax return?

Answer: because IRC § 3510(b)(1) provides that, solely for purposes of IRC § 6654, domestic service employment taxes are treated as a tax imposed by chapter 2 for the employer’s taxable year. They therefore enter the required annual payment for estimated tax, and a taxpayer whose withholding was set for salary alone will be short. IRC § 3510(a)(3) removes any deposit obligation, so nothing during the year prompts payment.

4. A client failed to file a required foreign trust information return. The trust’s gross reportable amount is $900,000 and no additional tax is due. What is the exposure?

Answer: substantial, and unrelated to the tax. IRC § 6677(a) sets the penalty at the greater of a fixed amount or 35 percent of the gross reportable amount, so the percentage governs here. A further penalty applies if the failure continues more than 90 days after the Service mails notice. That the trust generated no additional tax is irrelevant to the computation.

Change log

2026-08-19Initial draft. Sets out the IRC § 6019 gift return trigger, the IRC § 3510 treatment of domestic service employment taxes as estimated tax, and the penalty structures under IRC §§ 6038, 6677 and 6721.