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IRS is Trolling in California for Gift Taxes

Introduction
California's Proposition 13 limits property tax increases for transfers from parents to their children or grandchildren (family transfers). IRS has obtained sweeping authority to acquire state computer records of family transfers from 2005 to 2010 to uncover unreported gift tax transactions.

IRS admits this is a fishing expedition, but considers the waters well-stocked with California taxpayers avoiding federal gift taxes.

Note: there are 15 other states that have supplied IRS with similar information, including New York, New Jersey, Pennsylvania, Texas and Washington.
Summons

Recently, a federal court in Sacramento, California granted IRS permission to subpoena family transfer information from 2005 through 2010, under a process known as a "John Doe" summons, which allows IRS to describe a class of potential taxpayers who may violating tax laws, rather than naming a specific individual.
Who's at Risk?
Those involved with family transfers between 2005 and 2010 who never filed gift tax returns should be concerned about receiving a visit from the tax man.

Although the gift-tax exemption is currently $5.0 million per person, it was limited to $1.0 million during the time period in question; consequently, those making family transfers in excess of $1.0 million could be facing federal gift taxes of between 35% to 47%, plus penalties.

Note: Many transactions are not considered gifts, notably transfers to revocable living trusts, limited liability companies, partnerships or corporations.
Joint Tenancy
Taxpayers may be shocked to learn that creating a joint tenancy could be a taxable gift, because a joint tenant generally has the right to "sever" the joint tenancy and own his or her share outright.

For example, assume father owns a rental unit worth $1.0 million and adds his daughter as a joint tenant. Father just caused a gift of $500,000 (ignoring fractional interest discounts), because daughter may sever the joint tenancy and own her 50% share as a tenant in common.

Note: Transfers between spouses are not taxable gifts; however, federal tax law does not recognize registered domestic partners as spouses.
Tenant Agreements
To protect against a gift-tax issue when creating a joint tenancy, the parties should have a written agreement stating that:

(i) neither party has the right to sever the joint tenancy without the consent of the other;

(ii) the joint tenancy is for estate transfer purposes only; and

(iii) the original owner will continue as the sole owner until he or she dies or the parties agree to sever the joint tenancy.
Conclusion
Californians who made family transfers between 2005 to 2010 could have federal gift-tax liabilities; if so, they should report the transactions and pay the taxes owed.

Those creating joint tenancies should strongly consider a written agreement to avoid gift-tax consequences.