Clients ask tax lawyers and CPAs all the time: "But how will the IRS catch me?" The tax advisers take great care to point out that our tax system is based on self-reporting, so, although we are not going to call the IRS on our own clients, the clients SHOULD have the proper returns prepared and filed.
This is especially difficult in the case of gift and estate tax returns. In contrast with income tax returns, which the IRS expects to receive every year, the IRS does not send a warning letter if you fail to file an IRS Form 709 (gift tax return) or 706 (estate tax return).
Starting about two years ago IRS speakers, at professional seminars, told us that it was going to look into property tax records to find non-filers. Since the IRS is busy with so many different initiatives, witness the large matter of the non-reporting of UBS accounts, and since the IRS is typically underfunded and understaffed, you can forgive us if we were skeptical of the possibility of the IRS going down to the L.A. County Recorder's office.
Well, in In re the tax liabilities of John Does, No. 2:10-mc-00130-MCE-EFB (E.D. Cal., Feb. 27, 2011), 59 DTR K-4 (March 28, 2011), the IRS has requested that a U.S. District Court grant a summons against the California State Board of Equalization to compel it to provide the IRS with the names of all individuals who have made gratuitous or nearly-gratuitous transfers of real property to family members in 2005 to 2010. Perhaps the IRS now has the "people power" or fancy computer programs needed to find deeds that are ripe with the non-payment of gift tax. For example, Joe and Kathy Jones transfer 50 percent of their interest in a 100 unit apartment building in Van Nuys to the Mike Jones, Trustee, of the J&K Jones Children's Trust. If the IRS did not receive a Form 709 for that year describing that deed, then an audit should ensue.
So this IRS venture may generate some interesting audits and attractive revenue, and remind taxpayers of the benefit of self-reporting. However, going forward, with a $5,000,000 per person gift tax exclusion, this initiative may be less fruitful.