Appraisers fear they’re at a greater risk of losing their licenses after the IRS eliminated its multi-tiered review system for valuation appeals.
The concern has been building since the IRS changed its instructions for employees reviewing potential penalties for inaccurate appraisals. Now, there is no longer the requirement for two IRS appraisers to review valuation appeals. The change could increase the likelihood of penalties for appraisers, which can range from tens of thousands to millions of dollars, estate tax professionals said.
The aim of the review process is to ensure that appraisers are calculating the fair market value of an asset accurately, said Bill Sanderson, partner at McGuire Woods LLP. Taxpayers hire their own appraisers, who may face a penalty under tax code Section 6695Aif they substantially misstate their valuation.
Such valuations are important for determining estate tax owed.
“There’s a tension between the taxpayers and the IRS regarding the fair market value of those assets,” Sanderson said. The review and threat penalties, are to settle that tension and deter appraisers from misstating their valuations.
The IRS didn’t return a request for comment. The agency made the change in its Internal Revenue Manual in January, and groups have recently been speaking out, and calling on the agency to explain the move.
Change Draws Ire
The American Institute of CPAs sent a letter to the IRS highlighting the need for expertise in examining valuation appeals, and warned that many appraisers could needlessly face penalties.
“It is necessary for IRS professionals who decide whether to initiate the section 6695A process to have, at a minimum, the requisite skills, experience and training the IRS requires for qualified appraisers,” said the letter, publicly released this week said. “The change implemented by the IRS removes an essential check and balance that has operated effectively for nearly 15 years.”
The expertise required for these valuations is important, considering the nuances that uninformed reviewers might not be aware of, said Eileen Sherr, senior manager at the AICPA.
“There’s different methodologies that are legitimate, and things can happen in the process of an appraisal that different people can have different opinions on,” Sherr said. “If two knowledgeable, educated appraisers are looking at it, we think that would be much more helpful than just a regular IRS agent that doesn’t have training in valuations to be looking at it.”
Future Battles Brewing
A group of 11 appraisal associations have told the IRS—according to a letter released this week under the Freedom of Information Act—that a spike in appeals would lead to many avoidable legal disputes.
“An adverse finding by the IRS can significantly impair, if not outright end, an individual’s career,” the letter said. “So every allegation must be taken seriously even where the valuation professional can demonstrate their conclusion was ‘more likely than not’ correct.”
Mark Gergen, a tax law professor at UC Berkeley School of Law, suggested that the bureaucratic nature of the old review process might have deterred people from filing appeals in the first place.
“Any time you make people report upstream, they’re less likely to do it,” Gergen said. “In addition, as you go upstream, if somebody makes a mistake in assessing the penalty it’s more likely to be caught. So you’ve got this structure that makes it hard to assess the appraiser penalty.”
However, Michael Brunson, board chairman for the National Association of Appraisers, also noted that “IRS hasn’t done anything to communicate to stakeholders the necessity for such an action.”
“Either share the logic behind this current decision, or postpone the decision and allow external partners a seat at the table so that there’s a full discussion of the intention and the potential unintended consequences,” Brunson said.