Before you commit yourself to an appraisal or valuation agreement, remember the statement above.
The Internal Revenue Service is actively seeking recovery of deductions arising from almost all facade easements; many if not most conservation easements (valued over $750,000), and all real property deductions for estate and gift tax purposes with property value over one million dollars.
The belief that they only look at a small fraction of cases is erroneous. All deductions fitting the above parameters are referred to specialists for further research.
If (as the Service likes to say) a deduction does not pass the ‘smell test’ based on the underlying property value or fractional interest deductions, then a risk analysis is performed to determine the potential recovery amount.
If the amount is over $250,000 a very thorough appraisal or valuation review will follow. In cases where the taxpayer has had past problems or where tax avoidance is suspected, then the audit may be pursued regardless of amount.
The Small Business / Self Employed (SB/SE) Division handles all the estate work through their staff Estate Tax Attorneys. Many of these have also been CPA-cross trained, and or Business Valuation Reviewer trained. A few also have real estate appraisal training.
All have access to the Large Business & International Division (LB&I) Valuation and Engineering Field Specialist Teams; including approximately sixty Certified Real Estate Appraisers.
Unlike YOUR appraiser, the IRS appraisers have anywhere from three to twelve months to review your submitted appraisals; “negotiate” with you and to write their final reports AFTER they have seen your appraisers complete work file!
Their opinions of value would rarely fall into a property’s middle value range. If they are going to face having the Appeals Division “give away” 50% of a claimed adjustment, then they are likely going to make that adjustment at the upper limit of a property’s value range.
You may or may not be able to negotiate penalties. You will NOT be able to have interest waived, even if the over or under valuation is not your fault!
During the audit process;
- The IRS will challenge the validity of your property appraisal without providing their own written appraisal in advance.
- You will be lead to believe penalties and costs will be worse if a formal report has to be issued.
- The IRS property fair market value may or may not have been developed by a qualified appraiser, using generally accepted, sound appraisal techniques.
- IRS will not waive all penalties and interest if your tax preparer or appraiser makes a mistake.
- IRS will not refund errors in your favor in excess of a million dollars without first referring it to a joint committee of congress.
- IRS will not voluntarily make adjustments favorable to you unless they see a clear potential to recoup that adjustment “plus” through procedural concessions they extract in return.
- IRS will attempt to bluff you into unfavorable settlements.
- IRS will not notify outside agencies to preserve your rights (example-stolen trusts) even when they have strong evidence of wrong doing by trustees.
- Internal IRS politics frequently play as big a part as laws do in determining who is pursued and who is not.
- Not all taxpayers are treated equally.
- ROTRs is against the law but management level IRS employees continue to collect ROTRs based employee revenue production data.
- IRS does not report bad appraisers or valuators to state regulatory authorities.
I am a former GS-13 employee of the Treasury Department, Internal Revenue Service, Large Business and International Division. I worked in the Engineering and Valuation Field Specialists Team out of Laguna Niguel, California in 2010 and 2011. My (former) badge number was 1557808.
My areas of expertise and interest were real estate issues involving estate and gift taxes, non-cash charitable donations and conservation easements. This included fractional interest discount review and evaluation.
During my time with “The Service” I was privileged to meet many outstanding individual revenue agents, engineers, attorneys and real estate appraisers. I also met several powerful Managers at the Team and Territory levels, up through the District Field Officer West. I also had the opportunity for extensive interaction with numerous IRS attorneys and fellow appraisers throughout the United States.
Like any large federal organization there is a mix of personality traits and varying levels of personal integrity and honesty to be found within the service. Some are more conscientious than others. All are looking for an ‘exception’ in your return appraisal documentation.
This is a concern only due to the extreme power these people have over individuals and large national, as well as multi national corporations. Over the years (1980's; 1990's and again in the 2000's) Congress found it necessary to intervene on behalf of the American Taxpayer to curb abuses. Congress passed various new regulations generally designed to promote fairer treatment of taxpayers.
However, they failed to eliminate the perpetrators of the abuses. Abuses have been documented over more than thirty years. Many, if not most managers have been with the IRS for twenty to thirty-five, or even forty years. Some of these same managers were present when the earliest abuses occurred.
They have ridden out reform oriented policy revisions. They are now in positions to influence application of those revisions. Some continue to oppose selected revisions.
The IRS has officially adopted the Uniform Standards of Professional Appraisal Practice (USPAP), and has included wording to that effect in the Internal Revenue Manual.
Despite this, the constraints of USPAP in developing credible opinions of specifically defined values are regularly circumvented to the detriment of taxpayers.
Most managers have either a CPA or engineering background. Many are AICPA members. The American Institute of Certified Public Accountants (AICPA) membership has not fully embraced USPAP, though officially the IRS has.
I naively asked why USPAP is not universally adopted by AICPA so that those representing taxpayers and those reviewing the work of CPA's, attorneys, probate referees and appraisers were all using the same standards.
The answer I was told, is that many in the AICPA simply do not accept USPAP - the tone of the reply indicated that this included the manager answering my question. The same CPA/ Business Valuation trained manager told me that (particular manager) personally did not even believe in “market data”.
The same manager currently supervises an appraiser investigating a major West Coast land issue that could result in taxes and penalties in excess of half a billion dollars! Can you imagine the consequences where an appraisal section manager that does not believe in the minimum acceptable appraisal standards or basic market data, is directing the real property analyses of major conservation easements? (* see final note-at page end)
The conditions noted above are an outgrowth of differences between professional disciplines with respect to their traditional concepts of value. The CPA profession normally deals with the concept of 'fair market value' while the professional real estate appraiser deals primarily with 'market value'. They are not the same. Neither are they 'nearly the same' as indicated in numerous IRS publications and guidelines for valuators.
To pretend that fair market value and market value are 'similar' is the same as saying that an apple and an orange are similar, with an inference that their values should accordingly also be similar.
Unfortunately Treasury Department regulations use the concept of fair market value in each of their several different “fair market value” definitions.
Depending on whether the appraisal is for an estate, gift tax, non cash charitable donations or conservation easements, the definition of value will differ. An outside appraiser, CPA or attorney can easily research Treasury regulations or the Internal Revenue Code and still not find the correct definition of value applicable to the issue at hand. This alone can cost taxpayers millions of dollars.
Many appraisals performed with the intent of providing support for a specific value which is in turn reported by a taxpayer, are rejected for no reason other than misunderstanding the required definition of value.
The problem is an easy one to resolve. Either apply USPAP across the board OR isolate the types of appraisals that may be performed by each profession, by federal statute.
The question is why the IRS does not ask congress to do so. They are well aware of the problem.
I believe based on experience that congress will ultimately be forced to resolve what the appraisal and accounting professions cannot or will not resolve. Neither is wrong in their core beliefs. Both sides have merit to their arguments.
The real estate appraiser that completes real property OR business appraisals / valuations must by law, conform to the requirements of USPAP. The CPA, attorney or probate referee who perform appraisals of real estate or real estate interests is under no similar obligation as long as it is only done for tax purposes.
Most taxpayers are unaware of the controversy or the risk to themselves as a result.
The biggest question is whether you want to risk your own (or client’s) deduction on a marginal quality, overly optimistic (or unrealistically conservative), low bid appraisal? Do you want to trust that your five, ten or hundred million dollar claimed credit / deduction has been based on a fully supported, discount priced appraisal?
It is not enough that the appraiser, CPA or other “valuator” tell you they have performed estate related appraisals in the past. At a minimum make them prove that they understand the IRS & Treasury Regulations concept of fair market value as opposed to market value; and that their report will provide the former.
If fractional interest discounting is involved, or likely to be, then ask what weight they place on partition costs in developing their discount. The IRS relies on this above all other methods for Tenant in Common partial interests, yet valuators continue to cite “court cases” as a methodology; or Partnership Profiles, or Market Studies that are thirty years out of date rather than to adapt to this known criteria. (This is discussed further in the appropriate web sub-pages).
All appraisals I perform will comply with both USPAP and accepted business valuation practices as applicable. Each is prepared with the specific Treasury Regulations; IRC and IRS Appraisal guidelines applicable to the issue. They will also contain all the support required for the value opinion(s) reported.
Cross reference is suggested to my Definitions of Value web page.
Nothing contained within this page is intended to provide specific tax advice for individuals or corporations. All taxpayers should consult their qualified accountants and attorneys for advice specific to their circumstances.
* The taxpayers privacy (and law) has been violated by the manager that made the disclosure. I will not repeat the unauthorized disclosures to me, herein. This was not my case, and the manager should not have discussed it in so much detail, that the company involved was identified.