The Wall Street Journal reported in its May 26, 2011 Personal Finance section that the IRS has embarked upon a “low-profile but sweeping effort” to uncover gifts of real estate that have not been reported. This effort is generally going to uncover transfers made by do it yourselfers who think they are capable of creating their own estate plans. Indeed, lawyers involved in these mechanisms for transferring wealth would either counsel against it or ensure that the proper tax forms were timely filed. The middle class will bear the brunt of this effort by the IRS in large part because they do not realize that their actions are “gifts.”
The issue generally arises when a parent decides to “make things easier” by transferring title to real property to a child during the life of the parent. In their minds, the transferor is not actually making a gift, rather, they are just “putting their children on title with them” to avoid legal fees later. Individuals generally transfer title to real estate from themselves to them and others in joint tenancy. The presumption is that the transferor will die first and that no problems could arise during their life. This transfer is a gift upon the date the joint tenancy deed is created.
I won’t get into the multitude of legal issues that can arise from these ill advised transfers other than the immediate issue which was raised in the WSJ article: gift taxes. As the law stands today, a person may generally give property worth $5 million without paying gift tax. The lifetime exclusion per person was $1 million through 2010. However, any time a gift exceeds $13,000 to any person, the transferor is required to file a federal form 709. Such form is generally filed at the time their income tax return is due.
Why is this important? There are penalties for not filing the tax return timely, for valuation understatements that cause an underpayment of tax, and for willful attempt to evade or defeat payments of taxes. See IRS 2010 Instructions for Form 709.
How is the IRS going about this quest? In California, the IRS requested a “John Doe summons” be issued by a federal judge to the State Board of Equalization, a taxing agency. The judge declined to issue the summons because the IRS had not demonstrated that the IRS could not get the data requested in a different way. Apparently, court records indicate that Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin have willingly handed over the information. The report indicates that the data showed “an extremely high failure-to-report rate.”
The best approach to address these issues is to actually file the requisite returns, even if they are late. There are many capable tax and estate planning attorneys who can assist. It is well worth the time and effort to hire one to do just that.