The easy flow of information between state, local and federal governments can be unsettling, especially because it typically leads to tax bills from one or the other. Now, there’s a new cause for concern: the IRS is reviewing local property transfers for gift tax compliance.
Property transfer records help the IRS discover family gifts of real property on which federal gift tax was not paid. Taxpayers commonly think that family gifts are never caught and that federal gift tax is the most notoriously uncollected tax. That may be true – but the IRS is actively working to change that. The IRS is focusing on property gifted to children, grandchildren, and other beneficiaries.
While not all states are swapping data with the IRS, many states do, including Connecticut, Florida, Hawaii, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington, Wisconsin, and Nebraska. In fact, the IRS claims noncompliance rates of 60% in Nebraska, 60% in Connecticut, 90% in Florida, 100% in Ohio, 90% in Virginia, 80% in Washington, and 50% in Wisconsin.
What to do about this? We recommend filing a gift tax return after making such a gift – for several reasons. First, such filing gets the statute of limitations running, which is usually three years after the return is filed. If you do not file a gift tax return, the statute of limitations never starts and the IRS can forever audit. Second, file the return if there’s anything odd about your gift, such as an annual exclusion gift that hinges on valuation. You don’t want to later have to fight about the value of the property when the gift was made.