In a 2014 decision by the U.S. Tax Court (Estate of Richmond v. Commissioner T.C. memo 2014-26), the IRS was successful in imposing a 20% accuracy related tax penalty because the valuation on the estate tax return was less than 65% of the proper value as determined by the court (a substantial valuation misstatement).
In order to avoid this penalty the estate had the burden of proving it acted both reasonably and in good faith in the valuation of the decedent’s assets. The court determined that the estate failed to prove it acted reasonably or in good faith by relying on a draft valuation report prepared by a CPA who was not a qualified appraiser as defined in the Pension Protection Act of 2006.
This Act and Internal Service Regulations define a qualified appraiser as an individual who:
- Has earned an appraisal credential from a recognized professional appraisal organization.
- Regularly prepares appraisals for compensation.
- Demonstrates verifiable education and experience in valuing the type of property being appraised.
- Has not been prohibited from practicing before the Internal Revenue Service at any time during the three year period ending on the date of the appraisal.
- Is not an excluded individual (donor or recipient of the property being appraised).
The Tax Court decision in the Richmond case is a warning to taxpayers, estate attorneys, and tax professionals that all valuations prepared for the IRS (gift, estate, or other tax matters) should be prepared by a qualified appraiser. Use of a qualified appraiser will help to avoid valuation errors and provide a valid defense should the IRS attempt to impose any accuracy related tax penalties.
Should you have any questions on business valuation or who is considered a qualified appraiser, please call one of our credentialed professionals at (615) 822-8342 or contact us via email.
Janicek Valuation & Forensic Services, PLLC 