The IRS has been embarking on a new initiative: Track down and catch US Gift Tax evaders who have transferred real property to family members any time since 2005 without paying Gift Taxes owed. The IRS estimates that between 60% and 90% of taxpayers that transfer real property to family members fail to file and pay Gift Tax. In an attempt to raise desperately needed funds for the US Treasury, IRS started its Gift Tax compliance program in earnest by using the increasingly more popular tax enforcement tool called the “John Doe” summons.
Use of the John Doe Summons
When the IRS issues a “John Doe” summons to a party (most of us are now very familiar with this powerful tool due to the robust enforcement actions against the Swiss banking industry) it essentially compels that party to produce information requested by the IRS. The summons does not identify the persons with respect to whose tax liability it is issued since the IRS would not have the taxpayers’ names. In the Gift Tax Compliance Program, the IRS has been issuing John Doe summonses to State property tax authorities or State real property title offices. The summons typically requests identification of transferors of real property who did not charge the recipient at all or only charged a nominal price. Typically these are gifts of real property made between family members and in the usual case, Gift Tax was never paid on the transfer.
Using State’s Evidence
Many States have now turned over the requested data including California, Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin. The IRS can go back very far in time to catch the tax evaders since the statute of limitations will not start to run against the IRS if a Gift Tax return was never filed. See http://www.irs.gov/pub/irs-pdf/f709.pdf (Gift Tax Return). An IRS official with the Compliance Program indicated that samplings of related-party transfers showed gift tax returns were filed 0% of the time in Ohio, and only 10% of the time in Florida and Virginia.
New Instructions Given to IRS Examiners in Internal Revenue Manual
The search for prior gifts has led the IRS to issue new guidance its IRS examiners in the Internal Revenue Manual (IRM) See IRM 126.96.36.199.6.2 updated earlier this year http://www.irs.gov/irm/part4/irm_04-025-001.html
The new guidance provides that prior to commencing the Gift Tax examination, the IRS examiner should request a transcript of all prior gift tax returns that the taxpayer has filed with the IRS, and the examiner should obtain copies of these returns (usually from the Service Center where they were filed). The examiner is then to determine the statute of limitations for each gift tax return and in addition the examiner is instructed to “probe for undisclosed transfers.” This seems to indicate that once a taxpayer is audited with regard to any gift tax return for a particular year, the audit will spread to all of the taxpayer’s gift tax returns! Another IRM section (188.8.131.52.6.5) discusses how the statute of limitations will apply in Gift Tax cases. This part of the IRM makes clear that if a gift is not adequately disclosed on the Gift Tax return, (that is, the gift is either omitted entirely or the Gift Tax return does not adequately apprise the IRS of the gift) the statute of limitations does not begin to run. This means the Gift Tax may be assessed at any time with respect to that gift. Similarly, if a Gift Tax return should have been filed, but was not filed, the statute of limitations also never starts to run.