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Saturday, September 23, 2006

APPRAISERS MORE AT RISK

Appraisers perform important functions for taxpayers, since many tax consequences relate to value of property. For example, a charitable contribution of property is based on the value of the property, and of course transfers of property for estate and gift tax purposes are taxable based on value.

When an appraisal is way off base, the taxpayers can be subject to substantial penalties. Under Code Section 6701(a), the appraiser himself or herself may also be subject to a $1,000 penalty, or $10,000 if a corporate tax return is involved, if it can be shown that the appraiser knew the report was false and would be used to reduce tax of another.

In addition to a the monetary penalty, after notice and opportunity for a hearing to any appraiser for whom a penalty had been assessed under Code Sec. 6701(a) the IRS could, under 31 USCS 330(c) : (a) bar the appraiser from presenting evidence or testimony in any administrative proceeding before IRS or the Treasury, and (b) provide that his or her appraisals wouldn't have any probative effect in any such proceeding.

The penalty stakes have now been increased for appraisers. New Code Section 6695A, enacted under the Pension Protection Act of 2006, imposes a new penalty on an appraiser if he or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or a refund claim, and the claimed property value on the return or refund claim that is based on the appraisal results in a substantial valuation misstatement under Code Sec. 6662(e) or a gross valuation misstatement under Code Sec. 6662(h) for the property. Code Sections 6662(e) and 6662(h) relate to various valuation misstatements in regard to various income, pension, and estate and gift taxes. No penalty, however, will be imposed if the appraiser satisfies the IRS that the value established in the appraisal was more likely than not the proper value.

The penalty imposed is lesser of:

(1) the greater of: (a) 10% of the tax underpayment arising from the valuation misstatement described in (B) above, or (b) $1,000, or

(2) 125% of the appraiser’s gross income for preparing the appraisal.

Therefore, the appraiser can be penalized up to 125% of his or her appraisal fee.

The 2006 Pension Act also removes the requirement that IRS must assess a penalty under Code Sec. 6701(a) (aiding and abetting understatements) before it can bar an appraiser from presenting evidence or testimony in any administrative proceeding before IRS or the Treasury and provide that his appraisals won't have any probative effect in any such proceeding. 2006 Pension Act §1219(d).
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