Although gift tax audits are historically rare, the IRS has examined hundreds of taxpayers in the last two years whom the IRS suspects made large gifts, yet failed to file the appropriate returns.

Borrowing from techniques long employed to identify noncompliant taxpayers in the income tax context, the IRS is using records obtained from third parties—namely, land records maintained in state and county offices—to root out intra-family land transfers for little or no consideration.

According to Bonaffini, in the past two years, 323 taxpayers have been audited for failure to file gift tax returns relating to gifts of real property, 217 cases were still under examination, and another 250 cases were being researched to determine whether to conduct gift tax audits. At the time, the IRS had determined that ninety-seven taxpayers had violated gift tax reporting requirements by failing to file, and just twelve cases resulted in assessment of tax and penalties.

The recent flurry of gift tax compliance activity took many in the tax community by surprise. The compliance initiative received no appreciable public attention until the recent dispute in California federal court where the District Court for the Eastern District of California, refused to enforce the IRS' John Do Summons against the California Board of Equalization (“BOE”) where it refused to voluntarily turn over this requested information. The court’s denial of the government’s petition may embolden additional states to refuse the IRS’s request for records.