Under Sec. 6695A, enacted by the Pension Protection Act of 2006, P.L. 109-280, appraisers may face monetary penalties for appraisals that lead to substantial and gross valuation misstatements on returns.
This section is intended to provide greater assurance that all appraisers and appraisals meet a minimum threshold of qualification. These qualifications include those of Secs. 170(f)(11)(E)(ii) and (iii), which provide that a qualified appraiser is an individual who:
- Has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements in IRS regulations;
- Regularly performs appraisals for which the individual receives compensation;
- Meets other requirements of IRS regulations or other guidance;
- With respect to any specific appraisal, demonstrates verifiable education and experience in valuing the type of property subject to the appraisal and has not been prohibited from practicing before the IRS at any time during the three-year period ending on the date of the appraisal.
Sec. 170(f)(11)(E)(i) defines a qualified appraisal as one that is (1) treated as a qualified appraisal under regulations or other IRS guidance and (2) conducted by a qualified appraiser “in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed” by the IRS. The IRS provided guidance on these terms in Notice 2006-96 and Prop. Regs. Sec. 1.170A-17.
The AICPA finalized and issued Statement on Standards for Valuation Services No. 1 (SSVS1), Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, soon after the enactment of Sec. 6695A. SSVS1 applies to all AICPA members, whether or not they hold an Accredited in Business Valuation (ABV) credential, and allows the AICPA to be recognized by the IRS as having generally accepted business appraisal standards, along with other organizations including the American Society of Appraisers, the National Association of Certified Valuators and Analysts, and the Institute of Business Appraisers.
The Sec. 6695A review process has a three-year statute of limitation from the later of the return’s due date or filing date. This process is independent of any tax deficiency negotiations with the taxpayer or any litigation. If an IRS reviewer believes that the correct value of the interest being appraised differs from the appraised value and that the appraiser has not complied with his or her organization’s standards, the review process may lead to penalties under Sec. 6695A and a possible referral to the Office of Professional Responsibility (OPR), which is charged with ensuring that practitioners adhere to professional standards and follow the law.
The penalty determination under Sec. 6695A asks two questions: First, is there a substantial or gross valuation misstatement, i.e., is the reported value for the property equal to or greater than 150% (substantial) or 200% (gross) of the correct value? Or, in the case of an estate or gift tax return, is the reported value equal to or less than 65% (substantial) or 40% (gross) of the correct value? If so, then the IRS asks: Is there a greater than 50% likelihood that the appraiser will prevail in court?
The penalty on a CPA or other person who provides a substantial or gross valuation misstatement is the lesser of:
- The greater of $1,000 or 10% of the underpayment attributable to the misstatement, or
- 125% of the gross income received from preparation of the appraisal.
If there was no direct appraisal fee, the IRS looks to other indications of compensation.
While penalties can be substantial, the appraiser may be more concerned about referral to the OPR and potential ramifications for non-IRS-related work, such as being excluded as an expert witness. A CPA whose valuation opinion or advice resulted in a penalty also could have professional liability implications for the firm and ethics compliance implications with the AICPA and the relevant state’s board of accountancy.
The OPR applies Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). Its August 2011 revision (T.D. 9527) added specific language related to appraisers. Potential sanctions include censure, suspension, and disqualifying individuals from practice before the IRS. Penalties may be imposed against the individual and the individual’s firm. All CPAs providing valuation opinions should be aware that this is an area of increased IRS scrutiny.
Practice tip. A CPA firm may want to establish that only its members with ABV or comparable credentials do business valuations or offer opinions about value. Partners should not offer clients oral or back-of-the-envelope valuation advice or preliminary analysis. CPAs need to understand SSVS1 and the potential ramifications to the individual and to the firm. Any practitioner doing a valuation who does not follow his or her credentialing organization’s standards poses a real danger to the individual and the firm. CPAs should also have a clear understanding with clients of the scope of engagements that could involve valuation issues. This is good for the CPA, the client, and the profession.
Editor’s note: This column is abridged and adapted from the authors’ article of the same title in The Tax Adviser, Nov. 2013, page 762.
—By Michael Gregory, ASA, CVA (firstname.lastname@example.org), founder of Michael Gregory Consulting LLC in Roseville, Minn., and Renée Marino, CPA/ABV, CFA, ASA (email@example.com), a business appraiser and expert witness with Cupitor Consulting LLC in Arden Hills, Minn. Gregory is a former IRS territory manager who focused on business valuation issues. Marino is a member of the board of governors for the American Society of Appraisers.
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