With the United States facing a record deficit of $1.5 trillion and a tax gap of $290 million, Uncle Sam is pinpointing his sights on the state of California to bulk up the coffers this year.

Essentially, what’s happening is that the IRS has asked the U.S. District Court for permission to scour through all of the tax-free property transfers in the State Board of Equalization’s Database for the years 2005-2010.

You may be wondering why the IRS would waste their time targeting property transfers that are by definition tax-free to begin with.

Well according to this article posted by MarketWatch, they are looking for unfiled gift tax returns on the transfer of homes and properties worth up to $1 million dollars.

If you’re not familiar with gift-tax rules, between 2005-2010, you could give one person up to $13,000 in total gifts without filing a return.  If you crossed that threshold, you would have to file a return on these “tax-free” transfers.  However, if you reached the exemption amount of $1 million, you would then face an increase in property taxes.

The rules on this have changed in 2011 thanks to legislation passed at the end of 2010.  You can read more about those changes here, but essentially, the lifetime exclusion has been raised to $5 million for the next two years.

It sounds like good news, but the catch is that this legislation is only effective until 2012, with members of Congress already working to bring back the $1 million dollar exemption at a tax rate of 50%!  (The tax rate was 35% before to give you a point of comparison).

That is why, as the MarketWatch article correctly points out, that anyone seeking to transfer property of significant value should be working with an Orange County estate planning attorney to ensure they are in compliance with these ever-changing tax rules.

Working with an Orange County estate planning attorney also helps to ensure you are filing the correct paperwork (such as the gift-tax returns in question) to minimize your exposure when the IRS goes looking for new revenue sources.

Are you now concerned that you transferred property between 2005-2010 without filing a gift-tax return?  Give our office a call at (949) 260-1400 and we can help you submit the proper forms to the IRS and help you minimize your exposure to any taxes, penalties or fees you may be facing.