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Let's assume this hypothetical.

My son is now 18 years old. Since he was 8, I've been setting aside the annual gift exclusion amount and placing it in a safe in my house. With snipers guarding said safe :)

4 People are involved.

My brother, my father, my father in law and myself. I gift each one of them the annual gift exclusion, in which they instantly turn around and gift that money to my son.

2010: 13,000 x 4 = 52,000

2011: 13,000 x 4 = 52,000

2012: 13,000 x 4 = 52,000

2013: 14,000 x 4 = 56,000

2014: 14,000 x 4 = 56,000

2015: 14,000 x 4 = 56,000

2016: 14,000 x 4 = 56,000

2017: 14,000 x 4 = 56,000

2018: 14,000 x 4 = 56,000

2019: 15,000 x 4 = 60,000

That amount would come out to: $552,000 in 10 years. On his 18th birthday, he went and purchased a $552,000 house.

Since none of the spouses are involved, this wouldn't be considered gift splitting, and no one would need to file a form 709 out. No one has to claim anything since I gifted them, and they gifted my son.

....Right?

  • 4
    Are there records of you 'giving' the money to your son each year? If not, this will be seen as a one-time gift at the age of 18, exceeding the annual gift limit. – user71981 Aug 4 at 8:35
  • Why do I need to keep records of this? Do you keep a record of every time you give your brother or son or nephew money to play at the arcades? Let's imagine in my world we throw thousands of dollars to our family members like its peanuts. The law states I can give a specific amount every year to 1 person without having to report it. How are they going to prove I did this over 10 years or I did it all with in 1 year. – Sickest Aug 4 at 21:12
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    "Why do I need to keep records of this?" because if you don't, then what you're proposing will look like a single large gift exceeding the limit. (Whether what you're proposing will get around that, I don't know... but with out records, it almost certainly won't). "Do you keep a record of every time you give your brother or son or nephew money" no, because those amounts almost never come anywhere near the appropriate limits. If they were to do so, then keeping records would also be recommended. – TripeHound Aug 5 at 6:44
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    Instead of doing something so complicated, you should learn how Warren Buffet used the gift tax exemption for the best gain scenario: instead of giving cash, make a bluechip stock or index ETF as a gift. – mootmoot Aug 5 at 11:09
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    You may also want to look up the "burden of proof" as it relates to the IRS, which even after legislative change in 1998 does not work the way you might think. They can invoke a "consistent pattern of unusual behavior" to show intent good enough for most judges, investigate and likely discover insufficient record-keeping on your behalf (pushing the burden of proof to you), and then use the step transaction doctrine to disqualify any documents you do have. If the amount is large they can get back tax, multiplier penalty, and a referral for criminal fraud all in one neatly packaged case :) – BrianH Aug 5 at 18:57
15

Gifts are unconditional. Gifting someone money so he can gift it again on his name is not actually a gift.

  1. If discovered it would be fraud since you are giving your relatives money not as a gift to them but as a means to get around tax laws. Your relatives could reject to be part of a fraudulent schema1.

  2. While the IRS will probably not know automatically of this:

    a. they could begin to investigate any of your relatives about some unrelated issue and find about those money movements. Your relative could find himself in a tight spot and offer to collaborate.

    b. they could begin to investigate your son and ask you about the source of that income; and when you tell them about your father, your brother and your father in law they will ask them about it.

    c. If using banks, those movements (someone getting paid $X only with no reasonable motive only to pay $X -or a significant part of it- to your son) could trigger some bank money laundering detection scheme; the IRS would be notified then.

    In any case the IRS will be most interested if any of such people lives in conditions which makes such a gift extravagant (i.e. your brother lives on the minimum salary yet he gifts his nephew the maximum available amount).

  3. Any of those people can accept your gift and just plainly keep the money. After all, gifts are uncondicional. You cannot just go and sue them; not only it would expose you but contracts for breaking the law are unenforceable.

TL;DR It is tax fraud. You could get caught. No one here knows the probability of the IRS discovering it or getting enough evidence to prosecute it.

1 And if they do not know that it is fraud and learn about it after they had commited it, they could be VERY angry at you for not warning them.

  • 3
    When a person walks in to settlement with 552K in 100's they will be reported, and the investigation will start. – mhoran_psprep Aug 4 at 11:26
  • 1. How could anyone prove that I gave them the money, and they didnt intend to give my son the money? 2. How can they track money movements of all cash? c. No one said anything about banks. I told you I have a safe guarded by snipers. Remember? 3. I specifically named those 3 other people to show I could trust them NOT to run with the money, and if they did so. So be it. It's a risk I was willing to take. How is this tax fraud? I gifted 15000 to my father on his birthday, he kept the money and gave that money to my son instead on his birthday. – Sickest Aug 4 at 20:58
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    Just because it's not easy to prove doesn't mean it's not illegal. They define gift in such a way that there is no reciprocity expected, your scheme doesn't follow this definition of gift. – Hart CO Aug 4 at 21:40
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    @Sickest And even if you can "prove" (e.g. with a signed letter stating the cash is a gift, free of obligation) that all your gifts were unconditional, the fact that each and every one of them was then in turn gifted you to your son would be a pattern that any prosecution lawyer could turn into a "beyond reasonable doubt" case that onward gifting was expected and that this was an attempt to evade tax. – TripeHound Aug 5 at 6:53
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    @TripeHound A cursory internet search says that the IRS can impose either criminal or civil charges, so if they don't feel like they have a strong enough case, I think that means they can go the civil route for an even lower evidentiary burden on their part. I.E., they won't even need "beyond a reasonable doubt." Just "more likely than not," which by the facts OP presented should be a pretty easy case to make ;) – bvoyelr Aug 5 at 19:04
9

You've got a good answer from @SJuan76, it is tax fraud. Since the annual gift exclusion amount is per person, if you are married you can gift your child 2x the annual exclusion amount. If your child is married and you are married you can gift 4x the annual exclusion amount. So you can give quite a lot without gift tax obligation (4x if both are married) and still quite a bit without additional filing requirement (2x if they are married).

Also, you can simply gift more than the annual exclusion amount without owing gift tax by counting the excess against your lifetime exemption (currently $11M). The majority of people don't have enough wealth to exhaust the lifetime exemption, so there's no need for a scheme to get around the annual exclusion limit.

  • You can't give your child 2x without reporting it. Which is exactly why I setup this hypothetical to avoid JUST THAT TYPE of answer. And I even specified it in the OP. My child isn't married, he just turned 18. I specifically made my son's age range between 8 to 18. Was to avoid the "my child is married" conversation. And when 2 spouses give money, it doesn't get hit on the lifetime exemption, but you still need to report it to the IRS. The whole point of my hypothetical was to show I didn't want to report any of it to the IRS. – Sickest Aug 4 at 21:03
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    You didn't make it clear that the ultimate goal was not reporting the gifts to the IRS. Regardless, your hypothetical is likely viewed as tax fraud because you're trying to circumvent the IRS requirements. You can give 2x if they are married without filing requirement, but I edited that part for clarity. – Hart CO Aug 4 at 21:33
9

All steps of a process are considered in total for tax purposes.

Under the Step Transaction Doctrine, the beginning-to-end of the process is considered:

interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction. By thus linking together all interdependent steps with legal or business significance, rather than taking them in isolation, federal tax liability may be based on a realistic view of the entire transaction.

  1. You can give $15,000 to your child without reporting it.
  2. You can give $15,000 to your brother without reporting it.
  3. Your brother can give $15,000 to your child without reporting it.

However, if 1, 2, and 3 all happen, the end result is still that you have given $30,000 to your child. If this is not reported, that would be illegal.

Relatedly, unless you are planning on your estate plus the sum of all your gifts being greater than $11,400,000 (as of 2019), or $22,800,000 if your spouse is considered, there will be no tax at all to begin with. If you do expect to surpass the $11,400,000/$22,800,000 mark, you are well advised to consult with an accountant and/or tax attorney to provide the most tax-efficient solutions.

  • +1. In short, "Yes, we know about money laundering. Yes, it is still against the rules to do it." :) – bvoyelr Aug 5 at 19:21
  • The numbers have been increased for 2019. A minor edit that shows how following the rules is still of no cost for 99.9% of taxpayers. No need for all the proposed nonsense and potential tax fraud. – JTP - Apologise to Monica Aug 7 at 1:12

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