The IRS is currently in the midst of a major initiative to ferret out taxpayers who have failed to file gift tax returns to report gifts of real estate. In recent years, large gifts of real estate to family members have become commonplace due to the ability to take advantage of various discounts that reduce the value of the amount gifted. New gift tax laws enacted at the end of 2010 made the gifting of real estate even more popular since the IRS raised the lifetime gift exemption amount to $5 million through the end of 2012. This is the lifetime limit on how much a person can gift without paying any gift tax. However, whenever a gift to one donee exceeds $13,000, the filing of a gift tax return is required to report this gift. There are no exceptions to this rule for gifts to family members. Even though no gift tax is payable, gift tax returns must be filed to report gifts valued in excess of $13,000.
The IRS has asked states to share their transfer tax records
The Kiplinger Tax Letter reported back in February that the IRS estimates that 60% to 90% of taxpayers fail to report gifts of real estate by filing the required Form 709 Federal Gift Tax Return. In the past, there was not a lot of audit activity in this area since it was hard to target potential non-filers. Over the past two years, the IRS has become more aggressive at finding ways to identify possible real estate transfers by encouraging the cooperation of states to turn over their transfer tax records. So far, Wisconsin as well as 14 other states have participated in this effort: Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia and Washington.
Recent unsuccessful efforts by the IRS to obtain these records from the state of California resulted in various court documents coming to light which highlight the following facts. Over the past two years, more than 500 taxpayers have been audited for failure to report possible gifts with at least half this many being considered for future review. So far, about 100 taxpayers were found to have failed to report gifts, but only a handful of cases have actually resulted in gift tax (the unreported gifts pushed the donor over the $1 million lifetime gift limit that applied prior to 2011). The court documents also confirmed high rates of noncompliance from sampling done in the 15 states that were supplying transfer tax records to the IRS. Wisconsin’s noncompliance rate is about 50%.
Make sure you have filed the appropriate returns
The IRS will not be backing away from this initiative anytime soon. They have stepped up their audit activity in many areas in addition to this one. They will be aggressively approaching more states to provide them with transfer tax information. Since Wisconsin is supplying the IRS with transfer tax information, they will be following up to ascertain whether gift tax returns are being filed to report gifts of Wisconsin real estate. There are at least 14 more states that are not far behind, with more to come.
The IRS has been aggressive in looking for non-filers in our state. So, it is important that you inform your accountant of all the gifts you make each year so they can assist you in determining whether you are required to file a gift tax return .
Contact any member of our Estate & Trust team with questions.
Debbie Robb has more than 25 years of tax experience with a special focus on tax planning and compliance services for estates, decedents and trusts.