Forbes Magazine is reporting that federal judge, Morrison C. England, Jr., will allow the IRS to mine California records for unreported gifts of real estate. For a long time the IRS has wanted to crackdown on the widespread failure of taxpayers to adequately file the required returns when transferring property between family members.

Generally, any gift of property, including real estate, must be reported to the IRS on a US Gift Tax Return (Form 709) if the gift to any one individual has a value in excess of the Federal Gift Tax “annual exclusion” of $13,000. Gifts to individuals in excess of $13,000 will only incur US Gift Tax if the donor’s total gifts in excess of the $13,000 annual exclusions exceed the US Gift Tax Exemption. That Exemption was $1,000,000, from 2002 through 2010 and effective for 2011 and 2012, and is now $5,000,000.

Even if no US Gift Tax is payable on a reported gift, the amount of gifts in excess of any individual annual exclusions will reduce the individual’s Federal Estate Tax Exemption because the US Gift Tax and US Estate Tax Exemptions are coordinated so that the use of the Federal Gift Tax Exemption uses the same amount of Estate Tax Exemption.

Earlier this year the IRS served a summons to a federal court in California. The IRS said the summons was necessary because the state’s Proposition 58 and Proposition 193 complicate the data the IRS maintains about real-estate transfers. Specifically, the summons provides that:

The Government seeks the identity of a class of California residents, between the years 2005 and 2010, who were involved in real property transfers from parents to their children or grandparents to their grandchildren for little or no consideration.

Forbes is reporting:

The IRS has already received information about intra-family property transfers from county or state officials in Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington state and Wisconsin. But officials of California’s BOE said state law prohibited them from disclosing the information without a court approved summons.

In an affidavit filed in the California case in October, Josephine Bonaffini, the Federal/State Coordinator for the IRS’ Estate and Gift Tax Program, said the agency has so far examined 658 taxpayers identified as transferring property to relatives and concluded that 238 of them should have, but didn’t, file [gift tax returns].

You can read the entire Forbes article here, or the court order granting the IRS permission here.

If you, have any questions regarding the transfer of property that you have transferred to a family member contact one of our experienced attorneys at (916)488-8501.