IRS’ Secret Crackdown on Real Estate Gifts

Bonaffini reported that she had been working with IRS teams across the country to examine taxpayers who have transferred real property to related family members for little or no consideration and who have failed to file Form 709. So far, the IRS has received information about such transfers from 15 states, she said.

According to a May 26 Wall Street Journal article, Bonaffini said that after digging through state land-transfer records for evidence of omissions, the IRS had reported that:

• It had examined more than 300 taxpayers in the previous two years for failure to report possible gifts;
• It was currently examining some 200 taxpayers;
• It 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.

Taxpayers are required to file gift tax returns for any transfer of property valued at more than $13,000. No tax is due and payable until cumulative gifts over and above the $13,000 annual exclusion exceed the current lifetime exemption of $5 million. A gift tax return is required even when no tax is due so the IRS can keep track of cumulative gift giving. Applicable taxable gift rates can go as high as 35%.

In a June 29 client briefing on the IRS’ compliance initiative, the law firm Fulbright & Jaworski LLP warned that taxpayers required to file a Form 709 who have failed to do so may be subject to penalties and criminal prosecution.