EXECUTIVE SUMMARY
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The Pension
Protection Act of 2006 changed
tax valuation matters that affect how
appraisals of non-cash contributions are
considered by the IRS.
The IRS now has
greater authority to impose
penalties on appraisers who value property
at an amount that the IRS later disputes.
The penalties create
new risks for CPAs placing
values on properties that appear on tax
returns by shifting some of the
responsibility from the taxpayer to the
appraiser.
If the IRS and
Treasury decide to specify the
professional responsibilities of
appraisers, additional sanctions are
possible for appraisers with a history of
problems or misconduct in this area.
Michael A. Crain,
CPA/ABV, is managing director of The
Financial Valuation Group, Fort
Lauderdale, Fla., and chairman of the
AICPA Business Valuation Committee. The
author wishes to thank Howard
Lewis, IRS national engineering
program manager, for providing information
for this article.
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he Pension Protection
Act of 2006, which was signed into law in August
2006, changed valuations for tax matters in two
areas. It changed the statutory definitions of
qualified appraisal and qualified
appraiser for charitable contributions.
These changes affect how the IRS considers
appraisals of non-cash contributions. The PPA also
granted the IRS new powers to sanction individuals
who perform valuations for any tax purpose. In
expanding the penalties the IRS may impose on
appraisers, the law shifts some responsibility for
accurate valuations from the taxpayer to the
appraiser. The IRS Office of Professional
Responsibility (OPR) will probably issue new
guidance on the responsibilities of appraisers.
NEW DEFINITIONS APPLIED TO CHARITABLE
CONTRIBUTIONS
Qualified appraisal.
Taxpayers must obtain a qualified
appraisal to substantiate deductions for some
charitable contributions under IRC § 170(f)(11).
In general, a taxpayer needs a qualified appraisal
for many types of non-cash donations with a value
of more than $5,000. The PPA says a qualified
appraisal is an appraisal of any property
that (1) is treated as a qualified appraisal under
regulations or other guidance prescribed by the
Treasury secretary and (2) is conducted by a
qualified appraiser in accordance with
generally accepted appraisal standards
and any regulations or other guidance
prescribed by the secretary. Prior to the PPA, the
law did not explicitly require that an appraisal
follow appraisal standards. These two new
definitions currently affect only charitable
contributions. The present law does not use the
two terms in gift and estate tax matters.
In October 2006, the IRS issued transitional
guidance in Notice 2006-96 on the two new
definitions. The guidance says an appraisal that
meets the requirements of the notice will be
considered a qualified appraisal for purposes of §
170(f)(11). The guidance cites the Uniform
Standards of Professional Appraisal Practice
(USPAP) as an example of generally accepted
appraisal standards. USPAP is promulgated by The
Appraisal Foundation and provides broad valuation
guidance for various types of property such as
real estate, personal property and businesses.
CPAs who follow the new AICPA valuation standard,
Statement on Standards for Valuation Services no.
1, Valuation of a Business, Business Ownership
Interest, Security, or Intangible Asset ,
should also comply with the PPA requirement for
using generally accepted appraisal standards.
Qualified appraiser. In
general, the PPA says a qualified appraiser
is an individual who (1) has earned an
appraisal designation from a recognized
professional appraiser organization or has
otherwise met minimum education and experience
requirements set forth in regulations prescribed
by the Treasury secretary, (2) regularly performs
appraisals for which the individual receives
compensation, and (3) meets such other
requirements as may be prescribed by the secretary
in regulations or other guidance. The PPA
tightened the definition of a qualified appraiser
by requiring explicit professional qualifications
and conformity to generally accepted appraisal
standards. The transitional guidance in Notice
2006-96 defines an appraisal designation and the
appropriate level of education and experience for
an appraiser valuing the type of property. The
guidance requires the appraiser to file a
statement acknowledging that he or she may be
subject to a civil penalty for a substantial or
gross valuation misstatement of the value of
property that the appraiser knows, or reasonably
should have known, would be used in connection
with a return or claim for refund.
NEW IRS POWERS TO SANCTION APPRAISERS IN
ALL TAX AREAS
The PPA expanded IRS
authority to sanction appraisers in all tax
matters including estate and gift, and income
taxation. The law adds a penalty provision for
appraisals that result in a substantial or gross
valuation misstatement in IRC § 6662. The PPA also
created IRC § 6695A for these types of valuation
misstatements. The IRS will probably issue
interim guidance that specifies the professional
responsibilities for appraisers. The Treasury
Department may also issue related regulations.
Should these responsibilities be required through
notice or regulation (any new regulations would
become part of Treasury Circular 230), the IRS
could impose sanctions on appraisers who fail to
meet their professional responsibilities.
IMPLICATIONS
The IRS now has broader
powers to penalize an appraiser when it
significantly disagrees with a valuation. CPAs
performing valuations for tax purposes will need
to develop appropriate evidence supporting their
conclusions. One particular challenge will be to
support valuation discounts on ownership interests
in businesses or holding companies for
marketability and control factors. These are
especially common in the gifting of interests of
family limited partnerships. The AICPA’s new
valuation standard, SSVS1, will help CPAs reach
supportable conclusions. The changes may also mean
additional compliance costs for taxpayers. These
costs may change how donors make charitable
contributions of non-cash properties. | |