Econintersect: Apparently there are some Mom and Pop failures to comply with U.S. tax law. It has come to light that the IRS has been investigating the failure of individuals to file gift tax returns (IRS Form 709). The full name of the form is the U.S. Gift and Generation Skipping Tax Return. Any gift, including real estate, with a market value in excess of $13,000 requires a return to be filed, whether any tax is due or not. Gifts of $13,000 or less to each individual in 2011 are exempt from the requirement. Also, gifts of any size to a spouse are exempt.The extent of the IRS effort began to come to light when the IRS filed a petition for records in California. From The Wall Street Journal:
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.
An affidavit was filed by attorney Josephine Bonaffini in support of the IRS position. Some details of that affidavit were summarized by AdvisorOne:
- It [IRS] had examined more than 300 taxpayers in the previous two years for failure to report possible gifts;
- It [IRS] was currently examining some 200 taxpayers;
- It [IRS] was considering another 250 for review.
Bonaffini wrote in her affidavit that examinations showed 97 taxpayers had failed to report gifts on Form 709, and a dozen cases had resulted in taxes or penalties because a gift had put the donor over the then-applicable $1 million lifetime gift credit.
Among the states that had provided information to the IRS, failure to file a Form 709 ranged between 60% and 90%, she said.
What complicates such an investigation is that the details of the transfers must be investigated to determine if tax law has been violated. This is most easily understood by looking at two case studies (developed by a GEI editor).
Case Study 1
Mr. X gifts (in 2011) ownership of his vacation cabin worth $100,000 to his son. The gift exceeds the annual gift limit of $13,000. Form 709 must be filed.
Case Study 2
Mr. X gifts (in 2011) ownership of his vacation cabin worth $100,000 to his two sons. If the cabin is jointly owned by Mr. X and Mrs. X, they have a $13,000 exemption each. If the two sons are both married, the gift can be made by both parents to four recipients: the two sons and their wives. That means the gift is actually eight individual gifts. The annual exemption limit has now become $104,000.
Since the transfer is composed of eight gifts, each less than the $13,000 limit, there may be no legal requirement that Form 709 be filed. However, some tax attorneys might recommend that Form 709 be filed voluntarily, especially for estates which might eventually approach or exceed the lifetime exemption. That would avoid future complications if the IRS questioned the status of the 2011 transfer when the estate of the survivor of Mr. and Mrs. X was settled.
The lifetime exemption in 2011 is $5 million. This amount is likely to change in future years.
Caveat: GEI News, including all staff, is not licensed to practice law. Legal scenarios are for educational purposes only and are not to be considered to be legal advice.
Sources: The Wall Street Journal and AdvisorOne
