How Does the IRS Know You Gifted Money?

The Internal Revenue Service (IRS) learns of gifted money through direct reporting and indirect data analysis. A financial gift is a transfer of property or money to another person without receiving something of equal value in return. While small gifts often go unnoticed, the IRS has mechanisms to track significant transfers of wealth to ensure compliance with federal tax laws.

The Gift Tax Return Requirement

The most direct way the IRS learns about a gift is through the donor’s reporting. Federal law requires the person who gives the gift, not the recipient, to file a tax form when certain thresholds are met. This reporting is based on the annual gift tax exclusion, which is $19,000 per recipient for 2025. A person can give up to this amount to any number of individuals each year without filing requirements.

When a gift to one person exceeds the annual exclusion in a year, the donor must file IRS Form 709, the United States Gift Tax Return. This form documents the gift and applies the excess amount against the donor’s lifetime gift and estate tax exemption, which is $13.99 million for 2025. Filing Form 709 does not automatically mean tax is owed, but serves as a tracking mechanism for the IRS to monitor the use of the lifetime exemption.

Form 709 requires the donor’s information, the recipient’s name and address, a description of the gift, and its fair market value. The donor must also disclose if the value is based on a formal appraisal. The filing deadline is April 15th of the year after the gift was made, aligning with the income tax deadline.

Married couples can use gift splitting to combine their annual exclusions, allowing them to give up to $38,000 to a single recipient in 2025. To use this option, the couple must file a Form 709 to formally elect to split the gift. This creates a paper trail for the IRS to document the joint transfer.

Information from Financial Institutions

The IRS also receives information from financial institutions required to report certain transactions under federal law. While these reports do not identify transactions as gifts, they flag large movements of cash that can trigger IRS scrutiny. The legal framework for this reporting is the Bank Secrecy Act (BSA), designed to help prevent money laundering.

Under the BSA, banks must file a Currency Transaction Report (CTR) for any cash transaction exceeding $10,000, including both deposits and withdrawals. For instance, if a person withdraws $15,000 in cash to give to a family member, the bank files a CTR with the Financial Crimes Enforcement Network (FinCEN). The IRS has access to this data.

Financial institutions also file a Suspicious Activity Report (SAR) for any transaction they deem unusual. A SAR is not triggered by a specific dollar amount but by the nature of the transaction. Examples include a series of smaller transactions designed to avoid the $10,000 CTR threshold or a large wire transfer inconsistent with a customer’s financial profile.

Connecting Data from Other Filings and Records

The IRS can cross-reference information from various documents to identify unreported gifts. This data-matching capability allows the agency to find discrepancies by pulling from public records, other tax filings, and business documents to create a more complete financial picture of a taxpayer.

Public property records are a common source of information. When real estate is transferred, a deed is recorded with the local government. If a deed shows a property was transferred for a nominal amount, like $1, it signals to the IRS that the transfer was likely a gift. The agency can then compare the property’s assessed value with the donor’s tax returns to see if a Form 709 was submitted.

Information also comes from estate tax returns. When a person dies, the estate’s executor may need to file Form 706, the United States Estate Tax Return, which lists all taxable gifts the deceased made. The IRS can compare the gifts listed on Form 706 with its records of filed Form 709s to find any unreported gifts.

An individual’s income tax return can also point to a gift. If an audit reveals large purchases or investments with no corresponding reported income, the IRS will question the source of the funds, potentially uncovering an unreported gift. A large payment from a corporation to an individual that is not a salary or dividend could also be reclassified as a disguised gift from the business owner.

IRS Information Matching and Audits

The final stage of discovery involves the IRS’s internal analysis and enforcement. The agency uses automated computer systems to perform information matching, comparing a taxpayer’s return with data from third parties like financial institutions and public records. A significant discrepancy between these sources is a primary trigger for further review.

When the system flags a potential unreported gift, the case may be assigned to an IRS agent, which can lead to an audit. During an audit, the IRS contacts the taxpayer to request documentation and explanations for specific transactions. For example, an agent may ask for the source of funds for a large bank deposit or question a property transfer.

If an investigation confirms that a taxable gift was made and not reported, the IRS will require the donor to file the delinquent Form 709. The agency can also assess failure-to-file and failure-to-pay penalties, in addition to interest on any gift tax owed.