In 2008, Frank made an installment sale of real property to Stu, his son, for $1 million with payments due over a 10-year period. Frank did not file a gift tax return. For 2017, Frank reported taxable gifts so large that he used all of his unified credit then available. In 2020, the IRS audits Frank’s 2017 income tax return and discovers the sale. The IRS then contends that the property Frank sold was worth $2.5 million in 2008 and that Frank made a $1.5 million gift to Stu in 2008.

a. Can the IRS collect the gift tax on the 2008 gift? If not, will the 2008 gift affect the tax due on gifts that Frank makes in the future?

b. Will Frank potentially incur any penalty? Explain.