IRS Gift Tax Audits: Yet Another Reason to Avoid “Do It Yourself” Estate Planning

We have posted in the past about the potential consequences of failing to file a gift tax return with the Internal Revenue Service after doing some do-it-yourself estate planning. (See our February 11, 2010 post titled “Help Yourself to the Big House: Why Would You Risk Going to Jail Rather than Talk with a Lawyer?”).

We feel the need to address this subject again in light of a new IRS gift tax compliance initiative. The IRS is now using land records from state and local governments to identify individuals for gift tax audits. Specifically, the IRS is looking for real property transactions with little or no money exchanged, targeting a common do-it-yourself estate planning practice.

Many individuals choose to transfer real property to their loved ones by adding them to the deed rather than by executing an estate plan. However, this do-it-yourself estate planning move can have serious consequences for the transferor of the property. Adding an adult to a real estate deed constitutes a present gift of that real estate, or at least part of it. This means that a gift tax return must be filed with the IRS after the transfer takes place and that a gift tax may be due.

Although the gift tax lifetime exemption is currently $5,000,000, making it unlikely that you would owe any gift tax, the consequences for failing to file a gift tax return include criminal penalties as well. A conviction for failure to file a gift tax return can result in a fine of up to $25,000 and up to one year in prison.

Because the IRS has been and will likely continue to step up its investigation into and enforcement of the gift tax, it is more important than ever to get professional help with your estate planning to avoid a do-it-yourself disaster.