ALERT: Federal Judge Grants IRS "John Doe" Summons Seeking California Gift Tax Records

December 22, 2011

A federal district court judge in California has granted the IRS's "John Doe" Summons request seeking to obtain the names and records of California taxpayers who, from 2005 to 2010, transferred property to their children or grandchildren for less than full consideration. The petition, which had previously been denied by the court but was subsequently resubmitted, is the latest in a major IRS compliance initiative to identify individuals whom it believes have failed to report non-spousal transfers of real property on Form 709, the federal gift tax return.1

From a legal standpoint, the transfer of property from one person to another for less than full consideration is treated as a gift. Taxpayers must report gifts on Form 709, though certain exceptions exist for annual and lifetime exclusions, marital deductions, and wholly charitable gifts. Property included in a decedent's estate at death may also be subject to reporting on Form 706, the federal estate tax return. Should a taxpayer neglect to file a gift tax return or, when applicable, fail to pay tax, the IRS can assess penalties adding up to 47.5 percent of the tax due. Similar penalties can apply to incorrectly filed estate tax returns, as well. In cases of willful neglect or filing a false return, the IRS may pursue criminal charges in particularly egregious cases.

Taxpayers with gift tax compliance failures who wish to come forward and avoid criminal prosecution may have the option of retroactively filing and/or amending previously filed returns through the IRS's voluntary disclosure policy. The crucial factor in determining whether a taxpayer is eligible to make a voluntary disclosure is timeliness - that is, whether the taxpayer has come to the IRS before the commencement of an individual examination. If the IRS has already opened an examination of a particular taxpayer or has obtained information on that specific taxpayer's noncompliance, such individual may not be eligible to make a voluntary disclosure.

To date, fifteen states - Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin - have already voluntarily provided the IRS with records relating to intra-family property transfers. As of December 2010, the IRS had opened 323 taxpayer examinations and had found 109 instances of unfiled or underreported gift tax returns. The granting of the petition in the California John Doe summons case will undoubtedly lead to new gift tax examinations in California.

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[1] Michel, Scott D., and Kaufman, Beth Shapiro, "Unreported Gifts of Real Property: Time for a Voluntary Disclosure?" Tax Notes: August 1, 2011, 513-19.

If you have any questions about this alert, please contact:

Beth Shapiro Kaufman at 202.862.5062 or bkaufman@capdale.com
Lucy S. Lee at 202.862.8863 or llee@capdale.com 
Scott D. Michel at 202.862.5030 or smichel@capdale.com 


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