If I gift my friend $X, and then he gifts it right back to me, and we proceed to do this back and forth ad infinitum, is it the case that the IRS would eventually bleed that money to $0?
It's possible they could take that position, but I suspect you or your lawyer would be able to come up with a way out of most of it. For example, you could argue they were a series of interest-free loans, so there was no income to anyone (other than the forgiveness of any interest the IRS would impute to the loans). Or maybe there's an exception in the tax code for the situation you describe - I'm not a tax attorney :)
And as ebiester noted, there's an exemption for gifts under a certain amount.
I'm trying to think of a way to "test" this, like set up a couple of accounts and programmatically transfer money back and forth. I imagine most banks/processors have some sort of mechanism to limit transactions that would be considered suspect (such as automated back-and-forth transfers). But the lower limit's not a problem -- by repeating the transaction, you'd be contributing to the limit of $/year, even with a miniscule amount.
The bank doesnt report you. It is up to you to report yourself as receiving a gift. The entire US tax system works on self reporting and the fact that during audits if you have wilfully lied you will go to jail. So you can transfer some amount a million time and then just say you transferred it once and the IRS will probably never even look into it.
You are thinking of the inheritance tax. If I recall the gift tax and the inheritance tax interact, but you only pay the inheritance tax once, when you are dead.
Well, it'd probably get you flagged for investigation as an unusually incompetent money launderer, but I suspect you could convincingly argue that it's not taxable.
If I gift my friend $X, and then he gifts it right back to me, and we proceed to do this back and forth ad infinitum, is it the case that the IRS would eventually bleed that money to $0?