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Gift Tax Return Gotcha

A new IRS gift tax compliance initiative responds to suspicions of widespread failure to file gift tax returns.

Surprise. It’s a big year for the IRS and they’ve been opening many new fronts in the drive to assert tax law compliance. One of the largest and most unique fronts the IRS has opened has been a far-reaching gift tax audit on real estate transfers. As a recent Forbes article reports, the battle is tough going for the IRS, too.

The IRS estimates that somewhere between 60% and 90% of taxpayers will fail to file a gift tax return, despite having engaged in activity that requires a filing. As a result, it’s clear this is neither a petty problem in the Service’s eyes nor is it merely chump change waiting to be claimed. The problem with enforcing the gift tax has been the inability to catch someone in the act.

Never fear, the IRS has found just the right tool in the form of land records maintained at the state and local levels. Why? These public records allow the IRS to independently track the movement of properties between persons that haven’t shown up in gift tax returns. Family homes are just the sort of thing to pass easily between family members. However, things are rarely that easy when the IRS gets involved and that is just what’s happening now.

The lesson to be learned, regardless whether you have transferred any land in the past, is to be aware and diligent. While there are many ways and means to accomplishing your wealth transfer goals, you have to use the right tools.

Alternatively, those taxpayers who have transferred property without due diligence to the IRS’s gift taxes (and anyone following this story) have a grand development to watch. The IRS needs the states’ compliance to make their plan work and, while this has meant a great deal of cooperation in much of the country, it has met with resistance in California. There the courts have bristled at the IRS’s attempts to demand records. Forbes has a story to tell in the original article and the question remains: Will State courts further mire the IRS’s great gift tax audit effort?

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Reference:  Forbes (October 19, 2011) “The New Gift Tax Audits: IRS Identifies Non-Filers Using State Property Records

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