Audits of Gifts

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Statistics by the IRS show that between 60% and 90% of taxpayers do not file a gift tax return despite having engaged in a transaction requiring such a return. To nab the culprits, the IRS is using records obtained from third parties such as land records maintained in state and county offices to uncover intra-family land transfers for little or no consideration. Although land records at state governments are publicly available, the percentage of such suspected land transfers is relatively small compared to the humongous volume of other records. So the IRS has put the onus on state and local governments to provide it with the relevant records.  Click here to read or watch more IRS Help resources.

In the event that state or local governments do not provide the necessary information to the IRS, the Inland Revenue Code expressly allows the IRS to petition for a John Doe summons “which does not identify the person with respect to whose liability the summons is issued.” In other words, the IRS can name John Doe as a defendant representing any and all taxpayers who have transferred land for little or no consideration.

However, in order to issue such a summons, the IRS must establish three things. Firstly, the summons relates to an investigation of an ascertainable group of people; secondly, there exists a reasonable basis for believing that the group of people may have failed to comply with the IR Code; and finally, the records sought are not readily available from other sources.

Although failing to file a gift tax return may have severe consequences, the reality is that the majority of examinations have not resulted in assessed tax or penalties. This is because the Inland Revenue Code bases the civil penalty amount on the amount of tax due so failure to file a gift tax return generally results in no penalty if no tax was due on the taxpayer’s gift.

But if the gift is large enough to trigger a gift tax and no gift tax return was filed, you should not wait it out hoping that the IRS will fail to assess the tax and penalties while the tax is still enforceable. This is because Section 6501 (c) (3) of the Inland Revenue Code gives the IRS an indefinite amount of time to assess the gift tax when you fail to file a return. Another action the IRS may take is to press criminal charges under Code Section 7203, although the agency has not often done so.

 

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