There is a new reason to take the necessity of filing gift tax returns seriously. Not only are filing returns legally required, but the IRS is in the process of major compliance crackdown, which began in California at the end of 2010, and appears to be now going nationwide.
Intra-family real property transfers are, actually, fairly easy to track. Every property transfer in California requires the filing of “Change of Ownership Report” with the County Assessor, and is maintained in State Board of Equalization records. In California, if the transfer is a gift, the transfer may be exempt from reassessment if it is between certain family members, and as a bona fide gift it may also be exempt from documentary transfer taxes. Therefore, there is an incentive for family members to file forms with the transfer demonstrating that the property is being gifted. In an apparently unprecedented move, the IRS recently sought to compel the California State Board of Equalization to turn over its records regarding such transfers for little or no consideration, in In Re the tax liabilities of John Does, Case No. 2:10-mc-00130-MCE-EFB (N. D. Cal.).
This effort is only a part of a larger initiative – which some tax professionals call the “low hanging fruit.” The IRS is also attempting to obtain similar types of transfer records for: Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Texas, Virginia, Washington, Wisconsin, and Ohio.
Please also note that the necessity of filing a gift tax return not only applies to outright gifts, but also below market sales. The IRS will “deem” the difference between the fair market value and the “sale” price to be a gift.
The solution is fairly straightforward: File a gift tax return for transfers to any single donee for gifts exceeding the annual exclusion amount of $13,000. Even if the gift is within the amount of the donor’s lifetime exclusion, no tax may be owed. However, the return should be filed. Otherwise, you could have a nasty audit-surprise.