IRS tries to get tough on gifting real estate

The feds want a database of everyone in California who transferred real estate to relatives for little or no consideration from 2005 to 2010. That's probably quite a list - and if a federal judge grants their request, Californians who didn't file federal gift tax returns could face audits, penalties or even back taxes. From Bill Barrett at Forbes:

The IRS all but admits it is going on a fishing expedition for John Does-but one it considers to be in well-stocked waters. An affidavit attached to its lawsuit signed by Josephine Bonaffini, a Boston-based official of the national IRS Estate and Gift Tax Program, states that the agency already has obtained official real estate transfer information from 15 other states and found widespread noncompliance.

Nationally, Bonaffini said, "I estimate that between 60% and 90% of taxpayers that transfer real property for little or no consideration to family members fail to file a Form 709 as required by the internal revenue laws." She said samplings of related-party transfers showed gift tax returns were filed 0% of the time in Ohio, and only 10% in Florida and Virginia. She identified the other 12 states that coughed up data as Connecticut, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Texas, Washington and Wisconsin.

One area of exposure involves Proposition 13 - or more directly, the follow-up Propositions 58 and 193 that permit property to be transferred to children and, in certain circumstances, grandchildren, without forfeiting the 2 percent cap on property assessment increases. But to claim that exclusion, you have to file paperwork with the county, and not everyone has done that. The IRS wants access to the Board of Equalization, where that information is stored.