The IRS has a low-profile but sweeping effort under way to use state land-transfer records for evidence of omissions in reporting gifts of real estate to family members. ... New tax rules have made big gifts to family members popular this year, as Congress raised the limit on how much a person can give in a lifetime to $5 million without having to pay gift tax. Still, any time a gift to one person exceeds $13,000, the giver is supposed to let the agency know in a filing.
Details of the IRS effort were revealed in a request to a federal judge in California for a John Doe summons for data that the agency wanted to serve on that state's State Board of Equalization, a taxing body. The IRS said it needed the summons because the state's Proposition 58 and Proposition 193 complicate the data the IRS maintains about real-estate transfers. This week, the judge said the IRS couldn't serve the summons because it hadn't shown it couldn't get the data otherwise. The IRS declined to comment.
A court document with the IRS filing described efforts by Josephine Bonaffini, the coordinator of an IRS state and federal gift-and-estate tax program, to find people who haven't filed Form 709 to report U.S. gift and generation-skipping transfer taxes to the IRS. ...
States that have handed over information on gift-like transactions are Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin, according to the document. Ms. Bonaffini examined a sampling of data from these states and it showed "an extremely high failure-to-report rate," the document said. A chart in the document indicated noncompliance rates of 60% in Connecticut, 90% in Florida, 60% Nebraska, 100% in Ohio, 90% in Virginia, 80% in Washington, and 50% in Wisconsin.
Many people do not think that merely putting a partner or cohabitant on the deed to the home is a completed gift. This is especially true for people who change the title on their homes to own it as joint tenants with right of survivorship. Often the transferor views this as a transfer that won’t take effect until death. But that is not true under state property law. The creation of the joint tenancy vests the new owner with a 50% interest in the home immediately. That makes the transfer a completed gift.
The IRS has been perusing public records looking for possible violations of the gift tax reporting rules. In California, the IRS asked the state Board of Equalization to provide records of real estate transfers that, under Prop 13, are protected from reassessment. All such transfers would occur between family members and would thus fall in the class of transfers most likely to produce a record of failure to report the gift.
The Board of Equalization (BOE) refused and so the IRS went to federal court and asked the court to order the BOE to comply with its request. On May 20, 2011, the court denied the IRS request. Read the court’s order here.