IRS Ruling on Gift Tax
(Gifting, tax filings, transferring of ownership to family, etc.)

Are you gifting your business or plan to in the near future? Have you had an accredited Business Valuation completed? Have you completed a 709 Form in detail, with justifiable value conclusions? If not the IRS can revalue these gifts at any point in the future. Typically the IRS has three years to review, or audit your tax returns. However, if your 709 Form is inadequately filled out (missing information, missing details, not valuing the gifted asset correctly, or not justifying the value of the asset), then the IRS can audit your return at any time. You would be responsible for back taxes, penalties, and interest from the date of the original filing. If you are planning on gifting at any point during your lifetime, and you do so correctly with a justifiable value, then the IRS has a limited time, three years to review your gifting. 

IRS Regulations for Section 301.6501(c)-1: "If a transfer of property, other than a transfer described in paragraph (e) of this, is not adequately disclosed on a gift tax (Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return) filed for the calendar period in which the transfer occurs, then any gift tax imposed by chapter 12 of subtitle B of the Internal Revenue Code on the transfer may be assessed, or a proceeding in court for the collection of the appropriate tax may be begun without assessment, at any time." Do you think an audit is no big deal? Read about this couple who went through a small business audit nightmare spending more than $95,000 in legal & professional fees, and still ended up with a $35,000 tax penalty in the end. 

When you file your Form 709 you have filing options. You can navigate the tax forms yourself, or you can hire a professional to do so for you. However, regardless of how you complete your 709 you will need to provide the following, (with proper justifications): 

• Supplemental Documents:  To support the value of your gifts, you must provide information showing how the value was determined. For stock of close corporations or inactive stock, attach balance sheets, particularly the one nearest the date of the gift, and statements of net earnings or operating results and dividends paid for each of the 5 preceding years.  An accredited business valuation of gifted stock is highly recommended, especially Companies experiencing high profits.
• Discounts:  If Schedule A includes a discount for lack of marketability, a minority interest, a fractional interest in real estate, blockage, market absorption, or for any other reason, attach an explanation giving the basis for the claimed discounts and showing the amount of the discounts taken.  Discounts should be based upon research and legal findings of past litigated gifting cases by the Internal Revenue Service.  An accredited business valuation will provide this.
• You will need to provide more than the summary information when filing your return, but the above includes the most difficult to understand and defend in an IRS audit. There are common mistakes made here, which can lead to the IRS "flagging" your return. For an entire "how to" on completing Form 709 see this pdf from the IRS. 

Note:  Anyone can gift up to $14,000 per year without taxation (2015). Therefore, with a little planning, individuals and companies may be able to avoid tax expenses related to gifting estates altogether. If you would like to know more about estate taxes, gifting taxes, estate gift planning, and the related processes please visit the IRS's website page on Estate and Gift taxes here, or contact us today! 

This case of fraud is so astonishing it has earned its own Wikipedia page. 

Investigators believe it all began back in 1991. Rita Crundwell, the city comptroller from Dixon, Illinois, began siphoning off funds into her own secret bank account. She used these stolen funds to purchase a vacation home in the sunny state of Florida, one very custom made $2 million RV (see photo), and to build, maintain, and operate her own world-class horse breeding farm (at the time of arrest included 400 horses). 

One might think her salary from a small town might also be small, but she actually had an annual salary of $80,000. In the end investigators were able to track down a whopping $53 million stolen from city accounts. She stole a rough estimate of $3,000 from every person in that town. Why was she able to justify this theft, when she already had a phenomenal annual income? Even more astounding, how was she about to get away with this for nearly 20 years? 

Local Mayor, James Burke claimed, "There were no red flags that we were able to, or did notice here at City Hall". However, it seems to me it might be a little difficult to ignore the fact that your colleague is running a world class horse breeding farm, and your city accounts are running low, with service cuts being forced year after year. How was she caught? 

Rita Crundwell never took any vacation days. She would always pick up the mail at the post office, and if she pick up the mail herself, she would arrange for a family member to do so. This way, she was the only person reviewing the bank statements. Rita also made up fake invoices from her fake company (RSCDA - Reserve Sewer Development Account) disguised to be serving the city. This way she could send out city funds to herself. 

In October of 2011 she was forced to take an unexpected unpaid vacation, and her temporary replacement found discrepancies. Her temporary replacement, Kathe Swanson, discovered the RSCDA account and all the checks that went along with it. These discrepancies and suspicions were taken to her boss, and the FBI was subsequently contacted for further investigation. Rita Crundwell pleaded guilty to wire fraud in federal court in November of 2012, nearly one year after investigations started. 

During the 22 years of her theft the townspeople had suffered numerous dramatic service cuts because of "budget shortfalls". Prior to the year 2000, many of the locals believed Rita's horse farm was profitable all on its own, and that Rita was enjoying an inherited fortune. However, after the economic recession began, and she was still prospering, rumors begin swirling and many townspeople believed she was definitely stealing city money. Independent auditors still signed her financial statements and assured the townspeople no such theft was taking place. (Later sued by Dixon, winning a $40 million settlement.) 

After the initial arrest, the city's operational budget was off by $16.6 million, and it was also reported that Dixon lost nearly $30 million in operating funds over the previous 10 years while Rita was an employee. More than enough to avoid the dramatic service cuts the town had suffered. Rita was sentenced to 19 years and 7 months in prison, under the 20 year maximum sentence. Many believe she should have earned life in prison because of the harm she caused to so many people.