By J.P. Finet and Diane Freda
The Internal Revenue Service wants the California Board of Equalization to turn over its computer database in an attempt to find taxpayers who have not paid gift tax on transfers of property to relatives between 2005 and 2010.
In what several practitioners called a fishing expedition, the Justice Department, on behalf of IRS, has a federal judge for leave to serve a “John Doe” summons on the California Board of Equalization requiring the board to turn over records of property transfers for little or no consideration (In Re the tax liabilities of John Does, E.D. Cal., No. 2:10-mc-00130-MCE-EFB, filed 12/27/11). These practitioners say it the first they have heard of this gift tax compliance initiative.
According to the ex parte petition filed with the U.S. District Court for the Eastern District of California Dec. 27, the summons relates to the investigation of U.S. taxpayers who transferred real property between 2005 and 2010. It said the Board of Equalization (BOE) maintains information about transfers under California Proposition 58 and Proposition 193, which exclude from reassessment property transfers between parents and children and grandparents and grandchildren.
“Based on information received from examinations across the country and information voluntarily disclosed by other states, the IRS has determined that taxpayers who transfer real property to a related party for little or no consideration frequently fail to file Form 709 and report this transfer, despite the fact that they are required to do so by the internal revenue laws,” wrote Josephine M. Bonaffini, Federal/State Coordinator of IRS Estate and Gift Tax Program in a declaration filed with the court. “Thus, the IRS has a reasonable basis to believe that a significant portion of the California taxpayers who have transferred property to their children or grandchildren (as reported to the BOE on forms for exclusion of reassessment) for little or no consideration have failed to report these transfers to the IRS.”
Use of John Doe Summonses
A John Doe summons does not identify the person with respect to whose liability it is issued and may be served only after a court proceeding in which the United States establishes certain factors. A John Doe summons the Justice Department filed against UBS AG is widely credited with having been a major factor in the Swiss bank's decision to enter into a deferred prosecution agreement with the government and turn over information on the accounts of U.S. taxpayers.
“The IRS has used John Doe type summonses before and its going to happen again unless someone picks up the torch and runs for the taxpayers because the California Board of Equalization supports the petition,” Gordon Spoor, a CPA with Spoor Associates in St. Petersburg, Fla., told BNA March 25. Spoor said while taxpayers will argue they have a reasonable expectation of privacy, that argument is not likely to be upheld by the court because when public records are filed, there can be no expectation of privacy.
‘Low Hanging Fruit’
Spoor said the IRS is focusing on intrafamily property transfers because they require the filing of a form for reassessment if property is transferred to a family member. Those records are readily available and the IRS is going for “the low hanging fruit,” he said.
Practitioners have known for a long time that IRS would like to use compliance techniques on the gift tax side that it routinely uses on the income tax side, particularly document matching, said Ron Aucutt, partner with McGuire Woods in McLean, Va. “This is an opportunity to replicate that, by looking through registered deed records, stock transfer records, whatever they can get,” he said.
However, practitioners were caught by surprise by the petition—not only by the IRS's attempt to round up recalcitrant gift tax payers, but by the fact that an IRS gift tax compliance program exists at all.
“They've obviously got a lot of information and they have managed to keep it quiet for quite some time,” said Evelyn Capassakis, partner in personal finance services with PricewaterhouseCoopers in New York. “They haven't sifted through all of this in a day, yet they have managed to keep it quiet.”
Both Spoor and Capassakis anticipated trouble for both the IRS and taxpayers from the effort. Because no statute of limitations applies to gift tax returns, Spoor said it is the donee who will be liable to pay gift tax if the donor fails to do it.
Capassakis questioned how IRS will find the manpower to sift through all the data it collects, adding that there have been few tax audits in this area. “In 27 years, I could count the gift tax audits I have had on one hand,” she said.
Gift Tax Compliance Initiative Launched
Bonaffini said that for more than a year, she has been assisting IRS teams nationwide with their examinations of taxpayers who have transferred real property for little or no consideration to related family members and failed to report them on a Form 709. Specifically, she said she worked with teams in Florida, Nebraska, New York, North Carolina, Ohio, Washington, and Wisconsin. She added that many states and counties have voluntarily disclosed their property transfer data.
Based on information provided by the IRS examination teams, Bonaffini estimated that between 60 and 90 percent of taxpayers that transfer real property for little or no consideration to family members fail to report it.
“After learning of the estimated 60 to 90 percent failure-to-file rates in various states, the IRS Estate and Gift Tax Program concluded that failure to file required Forms 709 was a widespread issue and launched a compliance initiative to investigate taxpayers who have transferred real property to a related party for little or no consideration,” explained Bonaffini. The records sought by the summons will reveal identities and disclose transactions by people who may be liable for federal taxes, and will enable the IRS to investigate whether they have complied with the internal revenue laws.
The complete text of this article can be found in the BNA Daily Tax Report, March 28, 2011.
© 2011, The Bureau of National Affairs, Inc.