How Does the IRS Know if I Give a Gift?

The Internal Revenue Service (IRS) has several ways to track gifts you make to your grandchildren or other family members:

1. Filing Form 709:

The primary method the IRS uses to discover gifts is through Form 709. This form is required for gifts exceeding $15,000.

2. Audits:

During an audit, the IRS may uncover gifts by matching transactions for certain assets or through reports from banks for cash transfers exceeding $10,000.

3. Public Records:

The IRS can access public records, such as title transfers, to identify unreported gifts. Some states actively track gifts and report them to the IRS.

4. Informants:

The IRS may receive tips from individuals who are aware of unreported gifts.

5. Estate Tax Returns:

Upon death, the estate tax return may reveal gifts made during the individual’s lifetime that were not previously reported.

Penalties for Failing to Report Gifts:

Failing to file a gift tax return, even if no tax is due, can result in penalties. Additionally, the gift tax is integrated with the estate tax, which applies to amounts transferred upon death in excess of the remaining lifetime exemption.

Strategies to Avoid Gift Tax:

1. Utilize the Annual Exclusion:

Each individual can gift up to $18,000 per recipient annually without incurring gift tax.

2. Leverage the Lifetime Exemption:

Each individual has a lifetime gift tax exemption of $13.61 million (in 2024). Gifts in excess of this amount are subject to gift tax.

3. Gift Splitting:

Married couples can each make gifts to the same individual, effectively doubling the annual exclusion amount.

4. Pay for Education or Medical Expenses:

Payments made directly to educational or medical institutions for someone else’s expenses are not considered gifts and do not count against the annual or lifetime exclusion limits.

5. Establish a Trust:

Certain trusts, such as irrevocable trusts, can be used to transfer assets to beneficiaries while minimizing tax liability.

Remember:

• The gift receiver is not responsible for gift tax.
• The gift giver is responsible for reporting gifts over the annual exclusion on their tax return.
• Failing to report gifts can result in penalties and interest.
• Careful planning and consideration of individual circumstances are crucial to minimize gift tax liabilities.
• Tax laws and regulations can change over time, so it’s essential to stay informed and consult with a qualified tax professional for guidance.