For many in Scottsdale who are preparing an estate plan, a substantial gift may be a viable option for transferring assets to the next generation. This can be a good way to take advantage of the current gift tax exemption. Transferring assets by gift also allows the recipient to have the benefits of the asset while you are still alive.

According to the IRS Estate and Gift Tax program, of all the transactions that would require a person to file a gift tax return, only 10 to 40 percent of taxpayers actually file the proper return. While few people are ever audited to ensure compliance with gift tax filing requirements, even among those who are, many would not have owed any tax even if they had properly filed a return. This fact however, has not stopped the IRS from seeking property records from states in an attempt to conduct gift tax audits.

Over the last two years, just over 12 percent of taxpayers who the IRS had identified as having failed to file a gift tax return when they should have, actually owed any tax. The IRS can impose penalties for failure to file and pay the gift tax if the gift was sufficiently large to trigger the tax. But because the penalties are generally based on the amount of the unpaid tax, when no tax would have been due, no penalties are incurred even if the taxpayer fails to file a return.

A recent article in Forbes about the recent uptick in girt tax enforcement actions highlights the ongoing litigation surrounding how the IRS investigates who should file a gift tax return. One type of transaction in which the IRS is interested is when a family member transfers real property to another family member for a price far below market value. While the records are public the IRS has asked some states to provide a specific set of records that are more likely to be relevant, those that record intra-family transfers. Some state officials have questioned the validity of the request from the IRS because there are other ways that the IRS could collect the same information.

Those considering making a substantial gift as part of their estate plan should consult with a knowledgeable professional. Often the gift may not trigger the tax but still requires the filing of a return. By ensuring that you take the proper steps in the beginning you may be able to avoid headaches down the road.

Source: Forbes "The New Gift Tax Audits: IRS Identifies Non-Filers Using State Property Records," Josh Ungerman, Oct. 19, 2011