In its never-ending bid to pursue and find tax cheats, the IRS is now targeting state and local records to get to land transfers that did not have corresponding taxes paid.
The IRS is specifically looking for land transfers as gifts in which no gift tax was paid.
This is because it is difficult to obtain information about capital gains on sales of land and property, as states and local authorities do not keep records of payments for land transfers.
However, information from the state authorities can help identify land and property transfers made within a family, like from an owner to his or her children or grandchildren.
The IRS can then pursue payment of the corresponding transfer's unpaid gift tax.
Cap for Taxation on Gifts Ideally, any gift that exceeds a cap of $13,000.
00 needs to be filed.
There are few exceptions, such as gifts to a spouse.
Besides this filing requirement, every taxpayer has a lifetime tax-free threshold for gifts of $5 million.
This amount has gone up for the 2010 and 2011 tax year from the previous amount of $1 million, set in 2002.
Therefore, the IRS is aware that many taxpayers may have exceeded the gift threshold, especially when there was a property boom.
Even for those who may not have exceeded their threshold, any transfers would significantly have reduced this limit.
Besides the tax threshold, the IRS is also set to collect any penalties for non disclosure of such gifts as per the law's requirements.
Uncooperative States Unfortunately for the IRS, not all states are willing to provide their information about transfers of land and property.
In California for example, the state was reluctant to provide such information and the IRS had to seek intervention from Federal Court.
California's position was that the state laws prohibited it from disclosing personal information.
On their end, the IRS insisted that it was within their authorization to seek such information in a bid to identify tax cheats.
The court ruled in favor of the California State Administration and stated that the IRS had failed to demonstrate that it would only get the required information from the California State Authorities and no other details.
States that Cooperated With the IRS Operation However, not all states have provided resistance to the IRS's quest for land transfer information.
Many states have dished out the information as requested, which has given the IRS some significant success in tracking down gift-tax avoiders.
The states that have cooperated with the IRS include New York, North Carolina, Hawaii, Connecticut, Nebraska, Texas, Florida, Pennsylvania, New Hampshire, New Jersey, Wisconsin, Ohio, Tennessee, Virginia, and Washington D.
C.
According to a report from the IRS detailing their results from their investigations, many states have a majority of land transfers for gifts that are not reported.
According to the report, Ohio led in non-compliance with a 100% non-compliance rate.
Other state statistics include Virginia and Florida at 90%, Washington D.
C.
at 80%, Nebraska and Connecticut at 60%, and Wisconsin at 50%.
What to Do Many tax experts are advising those who have not been complying with the gift tax disclosure to do so immediately.
Once you have filed the gift tax form, the statute of limitation starts to count down.
The statute of limitations prevents the IRS from auditing a taxpayer more than 3 years after he or she has filed a return.
Therefore, by filing the form, you can hope that the IRS will not get to your case within the 3 year time limit and therefore, avoid an audit.
This approach may be preferred over the alternative, because if a taxpayer does not file a return at all, the IRS is not restricted by the statute of limitations and can audit a taxpayer indefinitely.