Appraisal report Assessment
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When estimating the estate or gift taxes for a client with a substantial value in a closely-held business you will have to rely upon the services of a business appraiser. In instances where you don’t know the appraiser well, there is always a concern as to how the appraisal might stand up to scrutiny before the IRS or in Tax Court.
A poorly done appraisal can cost your client a lot of money. Not only will a value differential subject your client to interest charges, if the differential is great enough, your client will be subject to the valuation inaccuracy penalties of IRC 6662. A value that is deemed by the IRS to be a “substantial” error would result in a penalty equal to 20% of the underpayment and, for a “gross” violation, a 40% penalty.
A central issue in the defense against the Sec. 6662 penalty is the extent to which taxpayer acted reasonably in preparing the return. Hiring a qualified appraiser and also reviewing the work product to see if a qualified appraisal was delivered goes a long way in being able to assert this defense. In the Estate of Richmond, the Tax Court ruled the Commissioner had met his burden of proof to show that the accuracy related penalty applied. The burden then shifted to the estate to show why it should be excused from the penalty.
In the Estate of Richmond, the Tax Court ruled the Commissioner had met his burden of proof to show that the accuracy related penalty applied. The burden then shifted to the estate to show why it should be excused from the penalty.
In that case the taxpayers first hired their CPA to perform the valuation. While that accountant did have have some appraisal experience (i.e., having written 10-20 valuation reports and having testified in court), he did not meet the standards for a Qualified Appraiser. That is, he was not regular employed as an appraiser and had no appraisal certifications from a recognized appraisal society. After the IRS challenge and prior to Tax Court, the Estate hired a Qualified Appraiser to produce a second report and to testify at trial. However, the Tax Court looked to the first appraisal and upheld the accuracy related penalty against the taxpayer.
What an Appraisal Assessment Does for You
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Complying with the Uniform Standards of Professional Appraisal Practice (“USPAP”), while not yet a legal requirement (except for charitable contributions), has nevertheless become a best practice for estate and gift tax valuation. In the assessments I do, I certainly examine this factor.
However, a USPAP compliant report just means the report will not be rejected at the get-go. It does not mean the report is persuasive, effective or even comprehensible. It is not my goal to second guess the valuation opinion expressed in the report. Even a technically sound report can have communication weaknesses which can be reinforced and improved without affecting the valuation conclusion. After having been through many Tax Court trials and dozens of IRS audits, I have learned (sometimes the hard way) what makes a good report.Over the years, I have been fortunate to have had some of the best attorneys in America review my work. In almost every instance, invaluable advice and suggestions in report writing was provided.