Leroy, who is subject to a 45% marginal gift tax rate, made a gift of a sculpture to Marvin, valuing the property at $150,000. The IRS later valued the gift at $400,000. The applicable undervaluation penalty is:

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The undervaluation penalty applies when the value claimed on a gift tax return is significantly lower than the IRS's determined value. The penalty is 20% of the underpayment of tax due to the undervaluation. The underpayment is calculated as the difference in tax based on the IRS's value and the taxpayer's value. Here, the difference in value is $250,000 ($400,000 - $150,000), and the tax on this difference at a 45% rate is $112,500. The penalty is 20% of $112,500, which is $22,500. However, the maximum penalty is capped at 40% of the underpayment, which is $45,000.

Leroy, Who Is Subject to a 45% Marginal Gift Tax