This is the accessible text file for GAO report number GAO-12-608 
entitled 'Appraised Values on Tax Returns: Burdens on Taxpayers Could 
Be Reduced and Selected Practices Improved' which was released on July 5, 
2012. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as 
part of a longer term project to improve GAO products' accessibility. 
Every attempt has been made to maintain the structural and data 
integrity of the original printed product. Accessibility features, 
such as text descriptions of tables, consecutively numbered footnotes 
placed at the end of the file, and the text of agency comment letters, 
are provided but may not exactly duplicate the presentation or format 
of the printed version. The portable document format (PDF) file is an 
exact electronic replica of the printed version. We welcome your 
feedback. Please E-mail your comments regarding the contents or 
accessibility features of this document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

June 2012: 

Appraised Values on Tax Returns: 

Burdens on Taxpayers Could Be Reduced and Selected Practices Improved: 

GAO-12-608: 

GAO Highlights: 

Highlights of GAO-12-608, a report to congressional requesters. 

Why GAO Did This Study: 

Misstated appraisals used to support tax returns have long caused 
concern. In 2006, Congress adopted the Pension Protection Act, which 
changed the criterion for when appraisals are considered to be 
substantially misstated and created a penalty for improper appraiser 
practices and qualifications for appraisers with respect to noncash 
charitable deductions. The Tax Technical Corrections Act of 2007 
extended the penalty for misstated appraisals to estate and gift taxes. 

Among its objectives, GAO was asked to (1) describe the extent to 
which individual, estate, and gift tax returns are likely to involve 
an appraiser and the extent to which IRS audits them; (2) describe how 
IRS selects returns likely to involve appraisals for compliance 
examinations, and assess whether the current appraisal threshold is 
useful; and (3) assess IRS procedures for ensuring that its appraisal 
experts are qualified. 

To accomplish these objectives, GAO analyzed IRS data, reviewed IRS 
guidance, and interviewed appropriate IRS officials. 

What GAO Found: 

Appraisers’ most prominent role relative to the three types of tax 
returns GAO studied is in the valuation of estates. In the most recent 
years for which GAO had data, appraisers were likely involved in the 
valuation of property worth from $75 billion to $167 billion reported 
on estate tax returns in 2009. In contrast, less than $17 billion 
worth of gifts in 2009 and less than $10 billion in noncash 
contributions in 2008 likely involved an appraiser. Gift tax returns 
that likely used appraisers had higher audit rates than gift returns 
that were unlikely to have appraisers. The use of appraisers was not 
associated with higher audit rates for estate tax returns and 
individual returns with noncash contributions. 

Table: The Extent to Which Appraisers Are Involved in Different Types 
of Returns: 

Type of return: Estate tax returns (filed in 2009);  
Returns likely to involve an appraiser as a percentage of all returns 
in that category: 90 percent to 95 percent;  
Estimated value of property likely to involve an appraiser: $75 
billion to $167 billion. 

Type of return: Gift tax returns (filed in 2009);  
Returns likely to involve an appraiser as a percentage of all returns 
in that category: 14 percent to 19 percent; 
Estimated value of property likely to involve an appraiser: $13 
billion to $17 billion. 

Type of return: Returns with noncash contributions (tax year 2008); 
Returns likely to involve an appraiser as a percentage of all returns 
in that category: Less than 1 percent; 
Estimated value of property likely to involve an appraiser: Less than 
$10 billion. 

Source: GAO analysis of IRS data. 

[End of table] 

The Internal Revenue Service’s (IRS) procedures for selecting returns 
to audit do not specifically target noncash contributions or gift or 
estate tax returns supported by appraisals. Nevertheless, returns with 
appraisals do get included in the population of audited returns 
because certain types of returns on which IRS does focus, such as 
higher-income ones, are also the most likely ones to have noncash 
charitable contributions that require appraisals. The current 
appraisal threshold for certain contributions over $5,000 has existed 
since 1984. The absence of an inflation adjustment over the past 25 
years means that many contributors who pay for appraisals would not 
have needed to do so when the current threshold was first introduced. 
IRS seldom takes issue with appraisals for noncash contributions. 
Consequently, there seems to be little risk in Congress raising the 
$5,000 dollar threshold. 

IRS appraisal experts in one division met standards for ensuring that 
they were qualified. However, art appraisal experts in another 
division are not subject to either a comprehensive quality review 
program or continuing education requirements specific to appraising 
art. The lack of comprehensive quality reviews and mission-specific 
continuing education requirements could make the art appraisers less 
effective than they otherwise would be. 

What GAO Recommends: 

GAO recommends that IRS develop a comprehensive quality review program 
for Art Appraisal Services (AAS) and establish appraisal training 
requirements specifically for AAS staff. Congress also should consider 
raising the dollar threshold at which qualified appraisals are 
required for noncash contributions to reflect inflation. IRS agreed 
with our recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-12-608]. For more 
information, contact James R. White at (202) 512-9110 or 
whitej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Appraiser Use Is Most Prominent in Estate Taxes, Is Associated with a 
Higher Probability of Being Audited for Gift Tax Returns, and Has Led 
to Six PPA Penalties: 

IRS Does Not Target or Staff Examinations Based on Appraisals, but the 
Current Appraisal Threshold May Impose Unnecessary Burden on Taxpayers: 

IRS Follows Accepted Standards When Hiring Qualified Appraisal Staff, 
but Gaps Exist in Training and Performance Evaluation for the Art 
Appraisal Service: 

Conclusions: 

Recommendations for Executive Action: 

Matter for Congressional Consideration: 

Agency Comments: 

Appendix I: Scope and Methodology:
Estate Tax:
Gift Tax:
Noncash Charitable Contributions: 

Appendix II: Appraisal Reporting Requirements for Noncash 
Contributions and Gift and Estate Taxes:
Noncash Charitable Contributions:
Estate Tax Returns:
Gift Tax Returns:
Penalty Thresholds and Valuation Misstatements: 

Appendix III: Tables on Appraisal Usage and IRS Appraisal Enforcement: 

Appendix IV: Comments from the Internal Revenue Service: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Estimated Numbers and Percentages of Tax Returns and Value of 
Property Likely to Involve an Appraiser: 

Table 2: Number of Estate Tax Returns Filed in 2007 through 2009, by 
Likeliness of Having a Valuation Done by an Appraiser: 

Table 3: Absolute Value of Assets, Deductions, and Exclusions Reported 
on Estate Tax returns, by Likeliness of Having a Valuation Done by an 
Appraiser: 

Table 4: Number of Gift Tax Returns Filed in 2007 through 2009, by 
Likeliness of Having a Valuation Done by an Appraiser: 

Table 5: Absolute Value of Assets, Deductions, and Exclusions Reported 
on Gift Tax Returns, by Likeliness of Having a Valuation Done by an 
Appraiser: 

Table 6: Number of Taxpayers Reporting Amounts in Section B of Form 
8283 in 2005 through 2008, by Likeliness of Needing a Qualified 
Appraisal: 

Table 7: Value of Deductions Reported in Section B of Form 8283 in 
2005 through 2008, by Likeliness of Taxpayer Needing at Least One 
Qualified Appraisal: 

Table 8: Audit Rates for Estate Tax Returns Filed in 2007 through 
2009, by Likeliness of Having a Valuation Done by an Appraiser: 

Table 9: Audit Rates for Gift Tax Returns Filed in 2007 through 2009, 
by Likeliness of Having a Valuation Done by an Appraiser: 

Table 10: Audit Rates for Taxpayers Reporting Amounts in Section B of 
Form 8283 in 2005 through 2008, by Likeliness of Needing a Qualified 
Appraisal: 

Table 11: Rates of Audit That Included Noncash Contributions as an 
Issue for Taxpayers Reporting Amounts in Section B of Form 8283 in 
2005 through 2008, by Likeliness of Needing a Qualified Appraisal: 

Table 12: No-Change Rates for Audit That Included Noncash 
Contributions as an Issue for Taxpayers Reporting Amounts in Section B 
of Form 8283 in 2005 through 2008, by Likeliness of Needing a 
Qualified Appraisal: 

Figures: 

Figure 1: Events in IRS Development of Appraiser Penalty Guidance, 
Calendar Years 2006 to 2010: 

Figure 2: Form 8283, Section B, Part I, Reporting Instructions for 
Noncash Charitable Contributions over $5,000: 

Abbreviations: 

AAS: Art Appraisal Services: 

AQMS: Appeals Quality Measurement System: 

CIC: coordinated industry case: 

EOAD: Examination Operational Automation Database: 

ERIS: Enforcement Revenue Information System: 

IC: industry case: 

IRM: Internal Revenue Manual: 

IRS: Internal Revenue Service: 

LB&I: Large Business and International Division: 

OPR: Office of Professional Responsibility: 

PPA: Pension Protection Act of 2006: 

SB/SE: Small Business and Self-Employed Division: 

SOI: Statistics of Income: 

TTCA: Tax Technical Corrections Act of 2007: 

USPAP: Uniform Standards of Professional Appraisal Practice: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

June 5, 2012: 

The Honorable Max Baucus:
Chairman:
The Honorable Orrin Hatch:
Ranking Member:
Committee on Finance:
United States Senate: 

The Honorable Charles Grassley:
Ranking Member:
Committee on the Judiciary:
United States Senate: 

The tax liabilities of individuals who make noncash charitable 
donations or who receive inheritances or gifts of property can depend 
significantly on the valuation of the property. Valuable property such 
as art, cars, businesses, real estate, and easements, by law must be 
independently appraised to determine exactly how much the taxpayer 
should report on a tax return. An appraisal is an opinion about the 
value of a particular asset at a particular time and is prepared 
following professionally accepted procedures. If appraisals overvalue 
the property in the case of charitable donations, or undervalue the 
property in the case of bequests or gifts, taxpayers may--
intentionally or mistakenly--pay less tax than they should. Although 
the Internal Revenue Service (IRS) has not determined the extent to 
which appraisals contribute to misreporting, data from an IRS study on 
taxpayer noncompliance showed a 45 percent error rate on noncash 
charitable deductions, totaling $4.6 billion in lost revenue. For 
about every five errors favorable to the taxpayer, one was unfavorable 
to the taxpayer. In 2005 IRS and the Joint Committee on Taxation 
identified overvalued donations of conservation easements[Footnote 1] 
as a particularly problematic issue. The problem persists. In 2011 the 
Department of Justice sought and the District Court for the District 
of Columbia issued an injunction against a company that IRS identified 
as improperly encouraging taxpayers to seek appraisers who would 
misvalue conservation easement contributions on building façades for 
noncash charitable deductions.[Footnote 2] 

Congress addressed appraisal-related noncompliance in the Pension 
Protection Act of 2006 (PPA) and the Tax Technical Corrections Act of 
2007 (TTCA). The PPA lowered the thresholds on when IRS should 
consider appraisals misstated, established a civil penalty for 
preparing a misstated appraisal, and set a statutory definition on 
qualifications for appraisers with respect to charitable deductions. 
[Footnote 3] TTCA extended the civil penalties for misstated 
appraisals to estate and gift tax valuations.[Footnote 4] 

Because of your interest in how these laws may have affected tax 
compliance, you asked us to review IRS's enforcement efforts with 
respect to appraisals. In this report we (1) describe the extent to 
which individual, estate, and gift tax returns are likely to involve 
appraisers' valuations, the extent to which IRS audits such returns, 
and the extent to which appraiser-specific penalties have been levied; 
(2) describe how IRS selects and staffs returns likely to involve 
appraisers that it chooses for examination, how examiners determine 
whether an appraisal is accurate, and the extent to which IRS uses 
contractors to provide appraisal expertise, as well as assess the 
usefulness of the current appraisal reporting threshold; and (3) 
assess IRS's procedures for ensuring that its appraisal experts are 
qualified. 

To identify the extent to which appraisers' valuations may cause an 
issue for estate and gift tax returns and for returns of individuals 
making noncash charitable contributions, we analyzed IRS Statistics of 
Income (SOI) samples of these three populations of returns for filing 
years 2007 through 2009 (for estate and gift tax) and tax years 2005 
through 2008 (for individual returns with noncash contributions). 
[Footnote 5] To identify the rate at which IRS audits returns with 
potential issues caused by appraisers and the amounts of tax 
adjustments for appraiser-related cases, we had IRS match the cases we 
analyzed from the SOI sample of taxpayers claiming noncash 
contributions against examination results data available from the 
Examination Operational Automation Database (EOAD), which contains 
information on audit adjustments relating to specific audit issues. 
Given the limitations of the issue coding in the database, we can 
reliably report on adjustments relating to noncash contributions but 
not specifically relating to the appraisal of those contributions. 
EOAD does not contain data for estate and gift tax audits, so we had 
IRS match the SOI cases for those taxes to data from the Enforcement 
Revenue Information System. This process allowed us to reliably 
determine which returns were audited. We calculated confidence 
intervals for all of our estimates. To report the number of appraiser 
penalties, we consulted with the IRS penalties officials who track the 
penalty created under the PPA. 

To describe how IRS selects and staffs appraisal-related examinations, 
we reviewed IRS staffing and case selection procedures and interviewed 
IRS officials responsible for examination planning. To gather 
information on how IRS audits tax returns with appraisals, we 
identified through our data analysis a random sample of tax year 2008 
returns that were likely to involve appraisals and that had been 
audited by IRS. We then reviewed the examination files for these cases 
to identify any inconsistencies between stated examination policies in 
the Internal Revenue Manual (IRM) and the recorded activities of 
examiners. To determine the extent of contractor use for appraisal-
related examinations, we reviewed contracting procedures in the IRM 
and other documentation from IRS. We then compiled data from IRS 
records detailing the use of contractors. GAO previously has found 
IRS's system for recording contracts to be unreliable for financial 
accounting, but the data was still reliable for purposes of this 
report. To assess how IRS ensures that its appraisal experts are 
qualified, we identified the types of experts IRS uses and compared 
IRS hiring, training, and performance quality review procedures with 
standards that GAO has proffered in the past regarding human capital 
management. We also interviewed officials responsible for staff 
performance quality. 

We determined for the purposes of this review that the data used were 
reliable (see appendix I for details on our scope and methodology). We 
conducted this performance audit from October 2010 through June 2012 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

The PPA set stricter standards for appraisals and appraiser 
qualifications, established a penalty on appraisers who prepared 
appraisals that improperly supported deductions on income taxes, and 
lowered the threshold for determining certain misstatements of value 
on certain tax returns. 

In terms of noncash charitable contributions, the PPA defined a 
"qualified appraisal" as one that was conducted in accordance with 
generally accepted standards by a "qualified appraiser."[Footnote 6] A 
"qualified appraiser" is defined as an individual who has earned an 
appraisal designation from a recognized professional appraiser 
organization or has met the minimum education and experience 
requirements set forth in the IRS regulations, and who regularly 
performs appraisals for compensation.[Footnote 7] For individuals, 
noncash charitable contributions are reported on Form 1040, U.S. 
Individual Tax Return, Schedule A, Itemized Deductions, and 
contributions of $500 or more must be itemized on Form 8283, Noncash 
Charitable Contributions. With certain exceptions, taxpayers claiming 
noncash contribution deductions of items or groups of similar items 
exceeding $5,000 must obtain qualified appraisals for the donated 
property, and report those on Form 8283, Section B (see appendix II 
for more detail).[Footnote 8] The provisions concerning qualified 
appraisals do not apply to estate or gift taxes. For those taxes IRS 
simply requires taxpayers to support property values with an 
appraisal, which could be a written appraisal by a professional 
appraiser, but does not have to be in every case.[Footnote 9] Estate 
taxes are reported on Form 706 and gift taxes on Form 709 (see 
appendix II for more detail on how appraisals may appear on these 
forms). In general, the higher the appraised value of a noncash 
charitable contribution, the higher the deduction a taxpayer might 
claim. Conversely, the lower the appraisal for property reported on 
gifts and estate taxes returns, the less tax must be paid. 

IRS has long had the authority to impose a penalty on a taxpayer for 
valuation misstatements included on a return, but prior to the PPA, 
IRS did not have specific authority to impose a penalty on the 
appraiser who prepared the valuation. The penalty rate has two levels 
related to the proportion of the misstatement. The PPA changed the 
thresholds for the two levels and increased the penalty rate for 
larger misstatements.[Footnote 10] The act also added an appraiser 
penalty, which applies to any person who prepared a misstated 
appraisal and knew or reasonably should have known would be used to 
support an individual income tax return.[Footnote 11] In 2007, TTCA 
made the appraiser penalty applicable for appraisals improperly 
supporting estate and gift tax returns. 

The responsibility for identifying cases with appraisals and staffing 
examinations on appraisals largely rests with IRS's Small Business and 
Self-Employed (SB/SE) Division, which handles complex individual 
returns and gift and estate returns, and its Large Business and 
International (LB&I) Division, which handles partnership returns with 
assets greater than $10 million. Examination of appraisals typically 
will be conducted with field examination techniques.[Footnote 12] 
Appraiser penalty cases are audited separately from the taxpayer 
examination cases in which IRS may have first noticed improper 
appraisals. 

Appraiser Use Is Most Prominent in Estate Taxes, Is Associated with a 
Higher Probability of Being Audited for Gift Tax Returns, and Has Led 
to Six PPA Penalties: 

Appraisers Play a More Prominent Role in the Reporting of Estate Taxes 
Than Gift Taxes or Individuals' Noncash Charitable Contributions: 

We estimated that more than 90 percent of estate tax returns filed in 
2009 included assets, deductions, or exclusions of more than $50,000 
in categories that IRS officials told us were likely to require the 
use of an appraiser.[Footnote 13] In contrast, less than 20 percent of 
gift tax returns and less than 1 percent for individual returns with 
noncash charitable contributions were likely to need an appraiser. For 
estate tax returns, we estimated that the aggregate value of property 
needing appraisers was at least $75 billion in 2009. This was greater 
than for gift or individual tax returns (see table 1 and tables 2 
through 7 in appendix III). 

Table 1: Estimated Numbers and Percentages of Tax Returns and Value of 
Property Likely to Involve an Appraiser: 

Type of return: Estate tax returns; (filed in 2009); 
Estimated number of tax returns likely to involve an appraiser[A]: 
30,000 to 32,000; 
Returns likely to involve an appraiser as a percentage of all returns 
in that category: 90 to 95 percent; 
Estimated value of property likely to involve an appraiser: $75 
billion to $167 billion. 

Type of return: Gift tax returns; (filed in 2009); 
Estimated number of tax returns likely to involve an appraiser[A]: 
34,000 to 43,000; 
Returns likely to involve an appraiser as a percentage of all returns 
in that category: 14 to 19 percent; 
Estimated value of property likely to involve an appraiser: $13 
billion to $17 billion. 

Type of return: Returns with noncash charitable contributions; (tax 
year 2008); 
Estimated number of tax returns likely to involve an appraiser[A]: 
Fewer than 76,000; 
Returns likely to involve an appraiser as a percentage of all returns 
in that category: Less than 1 percent; 
Estimated value of property likely to involve an appraiser: Less than 
$10 billion. 

Source: GAO analysis of IRS data. 

Note: Dollar figures have been adjusted for inflation to 2012 dollars 
using the U.S. GDP deflator. 

[A] For estate and gift tax returns we estimated the number of returns 
with appraisable items of more than $50,000 and $25,000, respectively. 

[End of table] 

The Likelihood of Audits Is Associated with Appraisals for Gift Tax 
Returns Being Audited but Not for Other Returns: 

For returns filed in 2007 through 2009, we found that gift tax filers 
who were likely to have needed an appraiser were at least twice as 
likely to have been audited than gift tax filers who were not likely 
to have needed an appraiser.[Footnote 14] Conversely, for estate tax 
returns we found no statistically significant evidence that the likely 
use of an appraiser was associated with a higher probability of being 
audited. Audit rates for estate tax returns (which ranged from 8.1 
percent for returns filed in 2007 to 10.1 percent for those filed in 
2009) are typically significantly higher than those for gift tax and 
individual income tax returns.[Footnote 15] 

For individual income tax returns for tax years 2005 through 2008, we 
could also not detect any statistically significant differences in 
audit rates based on the likeliness that a Form 8283 filer required a 
qualified appraisal.[Footnote 16] For most years, we found no 
statistically significant differences between the audit rates for 
taxpayers who claimed at least $5,000 worth of noncash deductions from 
Section B of Form 8283 and IRS's reported audit rates for all 
individual taxpayers, when compared in broad income groups. (For 2007 
returns, we found that the audit rate for high-income Section B filers 
was at least 1 percent higher than the rate for high-income taxpayers 
in general). We estimated that the rate of individual taxpayer audits 
that specifically included noncash contributions as an issue was 0.5 
percent or less for tax year 2008 but as high as 3.7 percent for tax 
year 2006.[Footnote 17] The total amount of upwards adjustments in tax 
liabilities associated with appraisals issues (and agreed to by 
taxpayers) was less than $37 million for each year from 2006 to 2008. 
For 2005 the amount was between $67 million and $91 million. 

For most of the years we reviewed, the sizes of our subsamples of 
audits that specifically identified noncash contributions as being an 
issue were too small to yield useful information concerning that 
particular issue's no-change rate[Footnote 18]. However, in the case 
of returns filed for tax year 2007 we were able to estimate that the 
no-change rate for noncash contribution issues was between 72 percent 
and 97 percent with a 95 percent level of confidence (see appendix II, 
table 12). 

IRS officials said the contributions that some individual taxpayers 
report on their returns are made through partnerships or Subchapter S 
corporations and that those contributions may be reviewed in audits of 
those entities rather than in audits of the individuals' 
returns.[Footnote 19] We reviewed data for all 121 partnership and S 
corporation audits involving noncash contributions that were referred 
to the Engineering Program (Engineering), a group within LB&I that 
staffs appraisal experts available to examiners for consultation, for 
assistance in calendar year 2010. We found that in 31 of those cases, 
the value of the contribution was identified as an audit issue. 
Separately, IRS officials told us that from 2007 through February 
2012, 500 individual tax returns were adjusted as a result of SB/SE 
audits of deductions relating to conservation easements claimed by 
these types of entities. 

As of March 2012, IRS Had Levied the PPA Penalty on Appraisers Six 
Times: 

The total amount of PPA penalties assessed in the six existing cases 
where appraiser penalties have been assessed was $159,713, with the 
penalty amounts ranging from several hundred dollars to tens of 
thousands of dollars. An IRS official said that the agency has not 
abated any of the penalties.[Footnote 20] 

IRS provided several reasons for the first PPA penalties not being 
levied until several years after enactment. First, given that the PPA 
penalties apply to appraisals accompanying returns filed after August 
17, 2006, IRS officials said that they estimated that returns 
containing appraisals that could be subject to the penalty would not 
enter the audit stream for a few years. Therefore, IRS targeted 2009 
to issue guidance and make computer system changes. IRS posted a 
notice about the legislation in 2006 and on August 18, 2009, issued an 
interim guidance memorandum as initial instructions for examiners on 
the application of the appraiser penalty. This guidance, which was 
developed by SB/SE and accepted by the other divisions of IRS, 
included procedures to make the penalty accessible by examiners and 
deliver the appropriate appraiser penalty assessment notices to 
appraisers.[Footnote 21] Second, IRS officials said that they had to 
create the computer infrastructure for examiners to apply and record 
penalties, draft and approve the form letters to be sent out to those 
assessed the penalty, and prepare the guidance for IRS examiners in 
the time between the PPA's passage and the issuance of final guidance 
on the appraiser penalty. A third factor IRS cited was that its 
examiners typically conclude a case against a taxpayer before pursuing 
a case against the appraiser. Figure 1 shows the sequence of events 
from passage of the PPA to the establishment of formal guidance for 
examiners in the IRM. 

Figure 1: Events in IRS Development of Appraiser Penalty Guidance, 
Calendar Years 2006 to 2010: 

[Refer to PDF for image: timeline] 

2006: 
* Pension Protection Act passes, creates penalty specifically on 
appraisers who misstate appraisals; 
* IRS posts notice about new penalty. 

2007: 
* Tax Technical Corrections Act passes, extends penalty to gift and 
estate taxes. 

2009: 
* Guidance on penalty released in memo form; 
* First penalty assessed on an appraiser under the PPA provisions. 

2010: 
* Final guidance for examiners recorded in Internal Revenue Manual. 

Source: GAO analysis of IRS documentation and public laws. 

[End of figure] 

Application of the appraiser penalty may increase as examiners become 
more familiar with the process of initiating these investigations, 
according to IRS examination officials. They said that traditionally, 
examiners have used other penalties to address appraiser 
noncompliance. Prior to the PPA, IRS could assess penalties on 
appraisers for promoting abusive tax shelters and aiding and abetting 
tax noncompliance under other sections of the Internal Revenue Code. 
[Footnote 22] IRS officials said that appraisal issues have never been 
significant in penalty cases compared to other promoter and preparer 
violations--officials estimated that maybe 10 or 15 out of every 1,000 
penalty cases involved appraisals. 

IRS Does Not Target or Staff Examinations Based on Appraisals, but the 
Current Appraisal Threshold May Impose Unnecessary Burden on Taxpayers: 

IRS Does Not Choose Returns for Examination nor Does It Staff Those 
Examinations Based on Appraisals: 

IRS's case examination planning and guidance for SB/SE and LB&I field 
exams does not explicitly target appraisals, but current selection 
methods may lead to cases with appraisals indirectly. Examination 
planners in both SB/SE and LB&I use database tools, such as the Audit 
Information Management System and the Examination Returns Control 
System, to manage cases for examination, but these databases do not 
contain variables that would enable exam planning or high-level case 
selection and staffing based specifically on appraisals. Consequently, 
when choosing returns to audit, IRS does not know whether any 
particular return has a related appraisal. For similar reasons, gift 
and estate returns also are not targeted for specific appraisal issues. 

Similarly, IRS does not staff examinations based on appraisals. The 
examiners who lead these teams are generalists and do not necessarily 
have specific expertise relating to appraisal techniques. The presence 
of an appraisal as a potential audit issue does not affect how IRS 
assigns these generalists to specific cases. 

Individual noncash contributions, gift, and estate tax returns with 
appraisals all may be selected for examination indirectly because of 
characteristics that are correlated with appraisals. For example, 
SB/SE field audit priorities focus on high wealth individuals, who are 
more likely to make the kinds of large noncash contributions, give 
large gifts, or have large estates that would include items requiring 
appraisals. In tax year 2008 individuals with adjusted gross incomes 
of $200,000 or more accounted for over 75 percent of the noncash 
contributions of real estate, easements, art, and collectibles 
reported on Forms 8283, even though they represented less than 15 
percent of individuals filing that form. Other SB/SE priorities that 
may indirectly involve appraisals include abusive transactions and 
special examination projects. Like SB/SE, LB&I does not select cases 
based on the inclusion of appraisals. LB&I devotes resources to 
priorities set in annual examination plans and then allocates the 
remaining available staff to other work. 

IRS has targeted noncash contributions for audits, which could include 
reviews of appraisals, but the targeting is not based on appraisals. 
IRS selects a portion of its examination inventory using a 
computerized scoring system called the Discriminant Index Function. 
Within this system, the presence of unusual, large, or questionable 
contributions is one of numerous factors that can increase the 
probability that a return will be selected for audit. IRS also has a 
matching program that compares Form 8283 with Form 8282, which 
includes the amounts donee organizations report to have received when 
they dispose of contributed assets. Mismatches between these returns 
can lead to an examination.[Footnote 23] In addition, one of IRS's 
past special examination projects specifically targeted deductions 
relating to façade easements in SB/SE's North Atlantic office, which 
could have involved reviews of appraisals on the easements' values. 
The project, which ran from 2008 to 2010, covered 152 tax returns. As 
of April 2012, IRS said it has closed 60 cases with an average 
recommended adjustment per return of $252,067.[Footnote 24] 

Examiners May Determine Whether Appraisals Are Accurate in the Process 
of Reviewing Returns, but the Current Threshold May Be Outdated: 

Although IRS does not select returns for examination based on 
appraisals, IRS case-review guidance may lead examiners to detect 
appraisal issues once a return has been selected for review for other 
reasons. Different guidance applies to examiners reviewing individual, 
estate, and gift returns. 

Noncash Charitable Contributions on Individual Returns: 

The guidance focuses examiner attention on a number of issues 
involving appraisals and related issues, including: 

* checking that taxpayers obtained qualified appraisals, if required; 

* verifying that the appraised values of noncash contributions 
exceeding $5,000 are listed in Form 8283, Section B; 

* ensuring that taxpayers attach qualified appraisals for certain 
assets, such as easements registered in historic districts; 

* auditing elements of noncash contributions that seem questionable, 
such as missing, incomplete or altered forms and documents, and 
contributions that seem excessively large compared to reported 
taxpayer income; 

* reviewing any large, unusual or questionable items relating to 
noncash charitable contributions; and: 

* reviewing the appraisal supporting donations over a certain amount 
for completeness and issues such as questionable authenticity and 
appraiser judgment. 

IRS officials said that it was up to the judgment of the individual 
examiner to decide whether the potential additional tax to be gained 
from investigating appraisals in detail warrants the investment of 
audit resources. The agency does not require documentation of such 
judgments when the issue has not initially identified for examination. 
Our review of 80 examination files from tax year 2008 with $5,000 or 
more in noncash charitable contributions showed that Forms 8283 were 
incorrectly filled out in 17 cases but the examiner made no change 
[Footnote 25]. In 10 of those cases, the examiner did not leave a 
record explaining why no further action was taken; therefore, we could 
not determine whether the examiners made a conscious decision not to 
follow up on the incorrect Forms 8283. In the other seven cases where 
the Form 8283 was incorrect and the examiner left a record, the 
taxpayers supplied additional information during the audit that 
satisfied the examiners. This shows that taxpayers can be compliant 
with the appraisal rules even when they do not fill out Form 8283 
correctly. We found no obvious incorrectly reported Forms 8283 in the 
other 63 cases. 

Our file review also suggests that, even in cases where examiners do 
change noncash contribution deductions, few of those changes are due 
to problems with appraisals. As discussed previously, for tax year 
2007, examiners made no changes to such deductions in the majority of 
cases in which noncash contributions were identified as a potential 
problem to review. Our file review showed that in only a small 
percentage of the cases in which noncash contributions were changed 
was the change made due to a problem with an appraisal. These facts 
suggest that IRS is not finding widespread noncompliance with 
appraisals for noncash contributions and the potential revenue yield 
from auditing appraisals of lower-value items is likely to be small. 
At the same time, the number of taxpayers who are required to pay for 
appraisals of items with relatively low values (in real, inflation-
adjusted terms) has likely increased because the $5,000 threshold has 
not been changed since Congress set it in 1984. The threshold would be 
worth more than $11,000 if adjusted to 2012 dollars. 

Gift and Estate Returns: 

Once IRS selects estate and gift returns for examination, classifiers 
review the returns to identify issues to be audited closely. IRS 
guidance instructs classifiers to review returns in their entirety, 
including a review of any appraisals. IRS estate tax return examiners 
and managers said that estate tax returns can contain voluminous 
documentation and examiners do not have enough time to go through each 
appraisal and audit every possible valuation issue. In cases where 
valuations are an issue for either estate and gift taxes, examiners 
review the appraisals attached to the schedules selected for 
examination and make referrals to IRS appraisal experts in LB&I's 
Engineering Department, as needed. If appraisals are not attached and 
should be, examiners contact taxpayers to request these. The value of 
some assets, such as publicly traded stocks, can be determined without 
complex methodologies, using public market quotations. Examiners also 
check appraised values using various tools depending on the type of 
asset. For example, examiners may use "blue books" or other resale 
guides for personal property, and may use various computer programs 
that have comparable-sales values for real estate. 

Examiners Working on Appraisal Issues Have Access to In-house IRS 
Appraisal Experts and Outside Contractors for Assistance: 

IRS employs appraisal experts in two areas, Engineering and Art 
Appraisal Services (AAS), which provide valuation assistance to 
examination teams in determining an appraisal's legitimacy. 
Engineering, as previously mentioned, employs staff appraisers who 
assist with the examination of complex appraisal issues,[Footnote 26] 
and AAS, part of the Appeals Office (Appeals), provides assistance 
specifically for appraisals of art. 

Under current IRS guidance, examiners should refer cases with 
appraisals above certain thresholds to Engineering and AAS appraisers 
for assistance.[Footnote 27] Estate and gift tax examiners must at a 
minimum consult with Engineering for assistance in determining the 
accuracy of appraised values for examinations where the focus includes 
appraisal issues. IRS guidance also encourages examiners to request 
the assistance of Engineering and AAS experts for cases not requiring 
mandatory referral, if valuation assistance is appropriate.[Footnote 
28] Our review of examination case files found that examiners made 
referrals in accordance with the guidance. 

IRS Entered into 23 Outside Contracts for Noncash Contributions, 
Estate or Gift Tax Examinations Involving Appraisals from 2005 to 2011: 

In addition to their internal sources of appraisal expertise, IRS 
examination teams also may seek outside contracts with professional 
appraisal experts to assist in reviewing taxpayers' property 
valuations. IRS entered into 23 contracts involving cases of noncash 
contributions, gift or estate taxes from fiscal years 2005 to 2011. 
The total amount awarded for the 23 contracts on noncash 
contributions, gift and estate taxes was $1.1 million, an average of 
$46,000 per contract. An IRS procurement official said that each 
contract may cover appraisal services for multiple properties. IRS 
officials said that it is more economical to hire outside appraisal 
experts who have expertise with certain types of assets, such as 
easements, than to have many in-house experts in highly specialized 
areas because the appraisal caseload in such areas would not support 
full-time staff. IRS policy requires examination teams to consider the 
availability and expertise of in-house appraisers prior to requesting 
the assistance of outside experts. 

IRS Follows Accepted Standards When Hiring Qualified Appraisal Staff, 
but Gaps Exist in Training and Performance Evaluation for the Art 
Appraisal Service: 

In our previous work on human capital management, we listed factors 
for ensuring high-performance human capital management and ensuring 
high program quality.[Footnote 29] Standards from our past work that 
are relevant to our review of IRS's appraiser qualifications include: 

* having a process suitable to hire qualified staff to audit 
appraisals, including specifically requiring appraisal expertise as a 
qualification; 

* formally training and educating its staff to keep up with job duties 
and individual developmental needs relevant to evaluating or auditing 
appraisals; and: 

* ensuring that staff are performing quality work during their 
examinations of appraisals, including a quality review system that 
covers appraisal skills and management oversight that evaluates 
appraisal skills. 

Engineering fully followed GAO's three standards for ensuring 
qualified staff; however, while AAS fully met the hiring standard, it 
did not meet the other two, creating risk that staff may not be 
performing quality work. 

Hiring: 

Engineering: The job description for appraisers in Engineering 
specifically requires applicants to have valuation and appraisal 
skills as a qualification, meeting the hiring standard. For example, 
the description says appraisers must have a "mastery of appraisal 
principles and concepts needed to serve as a technical authority." The 
hiring process then works through a combination of automated scoring 
and personal review suitable for hiring appraisers. Announced 
appraiser positions follow the Office of Personnel Management category 
for appraisers, series GS-1171. An automated scoring system called 
Career Connector assesses applicants' qualifications. IRS then hires 
from among the qualified applicants. 

AAS: The qualifications and hiring process for appraisers for AAS is 
similar to the procedure used by the Engineering and thus, AAS meets 
the standard. 

Training: 

Engineering: IRS maintains a formal training program for its 
Engineering appraisers that starts with new hires and continues with 
advanced, specialized training, including training on appraisal skills 
to meet the GAO training standard. The IRM specifies two appraisal 
organizations--the American Society of Appraisers and the Appraisal 
Institute--that may acceptable continuing education. LB&I has brought 
in trainers for some courses and maintains a budget for engineers to 
seek outside training, as well. Internal engineering training 
documents also state that engineers may develop a learning plan that 
includes 40 hours of training every year. 

AAS: Appeals requires 24 to 40 hours of continuing education per year 
for its employees, including its AAS staff, but it does not explicitly 
identify appraisal skills as a subject for training, preventing it 
from meeting the standard. Some AAS staff members have attended 
conferences on visual arts and the law and the American Society of 
Appraisers National Conference, which appear relevant to their work. 
However, in contrast to the standard of providing training relevant to 
specific job duties, the Appeals training guidance does not mention 
any relevant skills that appraisers must maintain, leaving the 
possibility that appraisers are not keeping up their skills and not 
evaluating art appraisals as well as they could. AAS staff have 
discussed a more specific training program for AAS new hires. 

Performance Quality Review and Management Oversight: 

Engineering: LB&I meets the GAO standard for monitoring performance 
quality with respect to its engineering group by subjecting its work 
to a quality review system and exercising management oversight of 
appraisal skills. LB&I uses an audit quality assurance system as part 
its LB&I Quality Measurement System. Having such a system enables IRS 
to improve procedures and issue development. 

In LB&I's quality assurance system, engineers are measured on four 
technical standards. The four technical standards focus on the 
following subjects: 

* planning; 

* inspecting and fact finding; 

* development, proposal, and resolution of issues; and: 

* workpapers and reports. 

Each of the technical standards includes a list of specific criteria. 
The correct auditing of an appraisal is not specifically covered by 
the standards. However, to the extent that an examination involved an 
appraisal, an engineer's work on the case would be covered under these 
four standards. For example, IRM guidance suggests procedures that an 
engineer should gather facts. Such a procedure would apply to 
gathering facts on an appraisal and would be checked during a quality 
review. To conduct the quality assurance reviews, LB&I randomly 
selects coordinated industry cases (CIC) and industry cases 
(IC).[Footnote 30] The results are reported in quarterly reports. In 
the first quarter of fiscal year 2011, five CICs covered engineers and 
three ICs covered engineers. None of the problems directly involved 
reviews of appraisal issues, but the assessments found problems 
relating to two of the technical standards on CICs and problems 
relating to three standards for ICs. On a more routine basis, team 
managers are required to review case performance, including technical 
aspects of an engineer's work. 

AAS: Appeals operates a case-review program called the Appeals Quality 
Measurement System (AQMS);[Footnote 31] however, most of the cases 
that AAS works are not Appeals cases and are not covered by this 
system. Therefore, IRS does not meet the GAO quality review standard 
with respect to AAS. Given that AAS is involved in only a small 
percentage of the cases that are appealed, IRS's Director of Tax 
Policy and Valuation said that she has been considering whether to 
supplement AQMS's random sample with a periodic, targeted review of 
AAS cases. She said IRS's goal is to start the reviews in fiscal year 
2013. Aside from AQMS, IRS guidance encourages examination offices to 
provide feedback on AAS's performance that "would be beneficial to the 
viability of this program." The AAS manager also reviews all cases 
that AAS completes before they are issued.[Footnote 32] However, there 
is no group-wide summation or tracking of these reviews or assurance 
that AAS staff are performing well specifically in regard to their 
appraisal work, as stipulated by the standard. Without systematic 
evaluation, erosion of the quality of AAS's work could occur 
unobserved. 

Conclusions: 

Appraisers play a large role in the amount of tax reported on estate 
returns, but have less pronounced effects on gift and individual tax 
returns. Although IRS does not specifically target tax returns that 
involve appraisals, the policies and procedures that IRS has in place 
to audit estate, gift, and individual income tax returns ensures some 
coverage of returns that do involve appraisals. For example, IRS 
already gives priority to higher-income individual returns in the 
examination selection process, and such returns are more likely to 
have appraisals supporting noncash contributions than the general 
population of returns. 

There are two areas where changes might lead to reduced taxpayer 
burden or improved agency performance relating to appraisals. First, 
the fact that the $5,000 threshold at which taxpayers are required to 
obtain qualified appraisals for noncash contributions has remained 
unchanged for more than 25 years means that some contributors today 
must hire appraisers to value property that would not have needed 
appraisals in the mid-1980s, when the threshold was adopted. The high 
no-change rate that we found through our data analysis and our file 
review indicates that IRS examiners find relatively little 
noncompliance relating to appraisals for noncash contributions. This 
low rate of detected noncompliance implies that very little revenue is 
gained by auditing appraisals of assets worth less than $10,000. 
Consequently, there seems to be little risk in adjusting the threshold 
for price inflation to better reflect the level Congress initially 
believed was appropriate to deter noncompliance. This adjustment would 
reduce the compliance burdens for contributors of such property and, 
if similar adjustments were made periodically in the future, would 
serve to maintain consistent treatment of taxpayers over time. Second, 
the lack of appraisal training requirements for AAS appraisers and the 
lack of a comprehensive quality control process for AAS cases put the 
quality of potentially high-value appraisal cases involving art at 
risk. 

Recommendations for Executive Action: 

To better ensure the quality of IRS's examination of appraisal issues, 
the Commissioner of Internal Revenue should take the following two 
actions: 

* ensure that a more comprehensive quality review system for work 
performed by AAS staff is implemented and: 

* develop more specific and documented appraisal training requirements 
for AAS staff, as LB&I has done for engineers. 

Matter for Congressional Consideration: 

To reduce the compliance burden on taxpayers making noncash 
contributions, Congress should consider raising the threshold at which 
taxpayers are required to have qualified appraisals for a particular 
contribution. Raising the threshold and giving IRS the authority to 
adjust this value for inflation in the future would maintain the 
consistent treatment of taxpayers over time. 

Agency Comments: 

We requested written comments from the Commissioner of Internal 
Revenue and received a letter from the IRS Deputy Commissioner for 
Services and Enforcement on June 1, 2012 (which is reprinted in 
appendix IV). IRS agreed with our recommendations. First, it agreed 
that a more comprehensive quality review process is appropriate for 
AAS, adding that IRS's goal is to supplement AQMS's random sample with 
a periodic, targeted review of AAS cases starting in fiscal year 2013. 
Additionally, IRS agreed that more specific appraisal training should 
be provided, adding that it is finalizing a more specific training 
curriculum for AAS appraisers. IRS also provided technical comments, 
which we incorporated into our draft. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to interested 
congressional committees, the Secretary of the Treasury, the 
Commissioner of Internal Revenue, and other interested parties. In 
addition, the report also will be available at no charge on the GAO 
website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-9110 or whitej@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix V. 

Signed by: 

James R. White: 
Director, Tax Issues Strategic Issues: 

[End of section] 

Appendix I: Scope and Methodology: 

This appendix provides further details on the methodologies that we 
used to estimate (1) the extent to which appraisals are an issue for 
estate and gift tax returns and for returns of individuals making 
noncash charitable contributions and (2) the rates at which the 
Internal Revenue Service (IRS) audits returns with potential appraisal 
issues. It also explains how we identified cases for our file review 
and how we obtained data on IRS's use of contractors. 

Estate Tax: 

The purposes of this section are to document (1) how we have placed 
the various assets, exclusions, and deductions reported on Forms 706 
into three groups based on the likeliness that a substantial appraisal 
was needed to value a particular item and (2) how we identified 
specific estate tax returns as being likely to have involved a 
substantial appraisal.[Footnote 33] Data for this analysis came from 
the Statistics of Income (SOI) estate tax samples for filing years 
2007 through 2009 (the latest years available at the time of our 
analysis). After identifying these various subgroups of taxpayers, we 
used their taxpayer identification numbers to extract data from the 
Enforcement Revenue Information System (ERIS) regarding any 
examinations they underwent for the tax years included in our scope. 
We converted all dollar amounts into 2012 dollars by multiplying them 
by the ratio of the 2012 index value for the gross domestic product 
(GDP) price deflator over the index value for the applicable year of 
death. 

Identifying Assets, Deductions, and Exclusions Likely to Involve a 
Substantial Appraisal: 

IRS technical advisors for estate and gift tax examinations identified 
the following assets, deductions or exclusions as being likely to 
involve an appraiser. 

* Retirement plans: 

* Personal residences: 

* Improved real estate: 

* Undeveloped land: 

* Real estate partnerships: 

* Closely held stock: 

* Farm assets and farm land: 

* Private equity and hedge funds: 

* Other limited partnerships: 

* Other non-corporate businesses: 

* Art: 

* Depletable/intangible: 

* Family limited partnership, tax value: 

* Conservation easements: 

The IRS technical advisors identified the following items that are 
included in the SOI dataset as being unlikely to involve an appraiser. 

* Cash: 

* Publicly traded stock: 

* Real estate mutual funds: 

* Federal, state, local, corporate, and foreign bonds and bond funds: 

* Other mutual funds: 

* Insurance, face value: 

* Insurance, policy loans: 

* Funeral expenses: 

* Executors', attorneys', and accountants' commissions and fees: 

* Schedule L and K debts and mortgages: 

The following categories contain assortments of assets or deductions 
that cannot be individually identified as being likely or unlikely to 
involve appraisers. 

* Other assets: 

* Mortgages and notes: 

* Other expenses and losses: 

* Bequests to surviving spouse: 

* Qualified terminable income property: 

* Charitable bequest deduction: 

Identifying Returns Likely or Unlikely to Have Had at Least $50,000 in 
at Least One Category of Assets, Deductions, or Exclusions That Would 
Have Required the Involvement of an Appraiser: 

We identified "returns with over $50,000 in any asset, deduction, or 
exclusion category likely to involve an appraiser" as those cases with 
more than $50,000 (in absolute value) in any category from the list of 
property likely to involve an appraiser above. We identified "returns 
with no more than $50,000 in every asset, deduction, or exclusion 
category likely to involve an appraiser" as those cases with no more 
than $50,000 (in absolute value) in any category listed in either the 
first or third lists of property above. 

Determining Taxability and the Buffer before Taxability Begins: 

We identified taxable estates as those with positive values for net 
estate tax. We defined the "buffer" before an estate would become 
taxable as the amount by which total gross estate less exclusion would 
have to increase or total deductions would have to decrease (holding 
credits constant) before an estate would become taxable. In other 
words, if a taxpayer has a buffer of $100,000, it would take some 
combination of increases in asset valuations or decreases in the value 
of exclusions and deductions summing to more than $100,000 before any 
exam adjustments would result in a tax increase. 

Extracting Exam Data from ERIS: 

We asked IRS to extract selected data from the ERIS database for the 
sample of estate taxpayers we identified from the SOI data. We counted 
any case that had a match in ERIS as having been audited. 

Gift Tax: 

The methodology that we used for the gift tax is similar to the one 
that we used above for the estate tax. The principal differences are 
that, first, we use a lower dollar limit ($25,000 rather than $50,000) 
in some of our comparisons because the size of the average gift is 
significantly smaller than the size of the average estate, and, 
second, we do not distinguish between taxable and nontaxable gift tax 
returns. (Many gift tax returns are not taxable; however, the amounts 
reported on these returns can ultimately affect the amounts of tax 
paid on estate tax returns.) The data used for this analysis come from 
SOI's sample of gift tax returns filed in 2007 through 2009, the 
latest available at the time of our analysis. The property and 
deduction categories recorded from these returns are slightly 
different from those recorded from the estate tax returns. We 
converted all dollar amounts into 2012 dollars by multiplying them by 
the ratio of the 2012 index value for the GDP price deflator over the 
index value for the applicable gift year. 

Identifying Gifts Likely to Involve a Substantial Appraisal: 

IRS technical advisors for estate and gift tax examinations identified 
the following gifts as being likely to involve an appraiser. 

* Retirement plans: 

* Personal residence: 

* Real estate, improved: 

* Undeveloped land: 

* Real estate partnerships: 

* Closely held stock: 

* Farm assets and farm land: 

* Private equity and hedge funds: 

* Other limited partnerships: 

* Other non-corporate businesses: 

* Art: 

* Depletable/intangible: 

The IRS technical advisors identified the following gifts that are 
included in the SOI dataset as being unlikely to involve an appraiser. 

* Cash: 

* Publicly traded stock: 

* Federal, state, local, corporate, and foreign bonds and bond funds: 

* Real estate mutual funds: 

* Other mutual funds: 

* Insurance, face value: 

* Insurance, policy loans: 

* Loans on personal residence: 

* Loans on other real estate: 

* Futures and commodities: 

* Annuities: 

* Nominal gifts: 

The following categories contain assortments of gifts that cannot be 
individually identified as being likely or unlikely to involve 
appraisers. 

* Mortgages and notes: 

* Other assets: 

* Adjustments: 

* Gifts to other donees: 

Noncash Charitable Contributions: 

To estimate the extent to which appraisals are used to support noncash 
contributions, we first reviewed IRS requirements for recording 
appraisals on Form 8283, Noncash Charitable Contributions. Next, we 
used data from SOI's annual studies of noncash contributions relating 
to the amounts and types of contributions that taxpayers reported on 
various parts of Form 8283 from tax years 2005 through 2008 (the 
latest years available at the time of our analysis) to (1) identify an 
upper bound for the number of taxpayers who potentially required 
qualified appraisals to support noncash contribution deductions 
claimed on Form 1040, Schedule A, Line 17, and (2) determine how many 
Form 8283 filers we could identify as either being likely to require a 
qualified appraisal or unlikely to require one. Filtering the SOI data 
involved the following steps. 

Excluding Filers Who Did Not Claim Any Deductions for Donations 
Reported in Section B of Form 8283: 

Qualified appraisals are not required for any donations reported in 
Section A of Form 8283; therefore, we excluded Form 8283 filers who 
did not report any contributions in Section B of the form. 
Furthermore, if a taxpayer reports a donation in Section B but does 
not carry any amount to Schedule A of the Form 1040, the taxpayer is 
not actually claiming any deduction for that donation. Consequently, 
we excluded all filers that did not have a positive value for the 
amount carried from Section B to Schedule A for any donation. 

Excluding Certain Additional Taxpayers Who Reported Amounts in Section 
B but Should Not Have Needed Qualified Appraisals: 

Taxpayers should not need a qualified appraisal if either of the 
following two conditions is met: the total amount moved from Section B 
to Schedule A for all donations is less than or equal to $5,000, or 
the only type of donation reported in Section B is intellectual 
property. We removed all such cases. 

Classifying the Remaining Form 8283 Filers for Reporting Purposes 
According to the Likeliness of Their Needing a Qualified Appraisal: 

SOI assigns each donation reported in Form 8283 Section B to one of 19 
different property-type categories. Donations in five of these 
categories (real estate except conservation easements, land, 
conservation easements, façade easements, and art and collectibles) 
need qualified appraisals unless they come from a business's stock in 
trade, inventory, or property held primarily for sale to customers in 
the ordinary course of its trade or business. We believe that this 
exception is not likely to apply to properties in the first four of 
these five categories. 

To identify donations of art and collectibles that potentially could 
have qualified for the exception, we did the following: 

1. For those filers who made a donation in this category, we used data 
from SOI's 1040 tax files to determine whether they had a Schedule C 
[Footnote 34] business in any of the following listed industry: 
[Footnote 35] 

* Art dealers: 

* Independent artists: 

* Jewelry stores: 

* Jewelry, watch, etc., wholesalers: 

* Beverage and tobacco product manufacturing (wineries are included in 
this category): 

* Beer, wine, and liquor stores: 

* Beer, wine and distilled spirits wholesalers: 

2. We assigned any of these filers that had at least one Schedule C in 
one of these industries a code that indicates that they potentially 
had an exception. 

Donations in two property categories, corporate stock and mutual 
funds, are excepted from needing qualified appraisals if they have 
readily available market quotations or are less than $10,000. This 
exception can also apply to securities, such as bonds, that are 
reported in the "other securities and investments" category. We had no 
way of reliably identifying which of the securities in these 
categories had readily available quotations, so we did not attempt to 
identify individual donations as being excepted or not. However, 
within the "securities and other investments" category, we did 
identify bond donations using the taxpayers' descriptions of their 
donations on line 5(a) and assigned them a code indicating that they 
were potentially excepted, which distinguished them from other 
donations in that category that were not excepted. 

Donations in the categories that do not involve securities may qualify 
for the inventory exceptions, and vehicle donations can be excepted 
under additional special conditions. Aside from the "other and 
unknown" category, donations in the nonsecurities categories, taken 
individually, account for very small shares of the total value of 
noncash contribution deductions. The "other and unknown" category 
accounts for about 6 percent to about 9 percent of the total value of 
deductions, depending on the year. In some of these cases the type of 
property donated is truly unknown because the description simply 
indicates that the donation was made by a partnership owned by the 
taxpayer. The remaining donations are of such variety that it would be 
difficult to apply the approach that we have set out above for 
identifying donations that potentially qualified for the inventory 
exception. 

After we completed all of steps described above, we grouped Form 8283 
filers into the following categories: 

1. Filers who had a donation in at least one of the following property 
categories: 

* Real estate (except conservation easements): 

* Land: 

* Conservation easements: 

* Façade easements: 

* Other securities and investments (excluding donations of bonds): 

* Art and collectibles (excluding donations identified as potentially 
qualifying for the inventory exception): 

2. Filers who had donations only in one of the following property 
categories: 

* Corporate stock: 

* Mutual funds: 

* Bonds: 

3. All remaining filers with Section B donations that did not meet the 
criteria for the first two categories. 

Filers in the first category, on average, are more likely to have 
appraisals than those in the other two categories; filers in the 
second category, on average, are less likely to have appraisals than 
those in the other two categories. We converted all dollar amounts 
into 2012 dollars by multiplying them by the ratio of the 2012 index 
value for the GDP price deflator over the index value for the 
applicable tax year. 

Obtaining Data on Audit Rates and Audit Issues: 

We asked IRS to extract selected data from the Examination Operational 
Automation Database (EOAD) for the sample of taxpayers that SOI had 
identified as having made noncash contributions. We counted any case 
that had a match in EOAD as having been audited. We identified cases 
as having had noncash contributions raised as an audit issue based on 
the form and line codes plus the Standard Accounting Identification 
Number recorded in that database. Given the limitations of the issue 
coding in the database, we can report on adjustments relating to 
noncash contributions but not specifically relating to the appraisals 
of those contributions. We identified audits in which noncash 
contributions were an issue as having been no-change cases if the 
agreed adjustment amount for that issue was zero. We used the results 
of our data matching for tax year 2008 to identify the cases for which 
we requested examination files to review. We reviewed the cases using 
a data collection instrument at IRS's New Carrollton, Maryland, office. 

We conducted this performance audit from October 2010 through June 
2012 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Appraisal Reporting Requirements for Noncash 
Contributions and Gift and Estate Taxes: 

IRS has established rules and procedures for taxpayers to follow when 
using appraisals to support noncash charitable contributions, estate, 
and gift tax claims. 

Noncash Charitable Contributions: 

Within certain conditions, taxpayers must use qualified prepared 
appraisals to support noncash-contribution deductions on Form 1040, 
Schedule A. Taxpayers list the total value of noncash contributions on 
Schedule A, line 17. Taxpayers claiming noncash charitable 
contributions over $500 must submit Form 8283, Noncash Charitable 
Contributions, which has two sections. In Section A of the form, 
taxpayers report noncash contributions that do not require qualified 
appraisals. Such contributions include items, or groups of similar 
items,[Footnote 36] with a claimed deduction of $5,000 or less, and 
securities of any value with readily available market quotations. 
[Footnote 37] For contributions more than $5,000, taxpayers must have 
an appraisal done and fill out Section B of Form 8283. Exceptions to 
the $5,000 threshold include: 

* nonpublicly traded stock of $10,000 or less; 

* vehicles if the deduction is limited to gross proceeds from sale; 

* intellectual property; 

* certain securities considered to have market quotations readily 
available; 

* inventory and property donated by corporations that are "qualified 
contributions" for the care of the ill or infants; and: 

* stock in trade, inventory, or property held primarily for sale to 
customers. 

Figure 2 shows the section of Form 8283 where taxpayers provide 
descriptions and appraised values of donated property valued at more 
than $5,000. Taxpayers are required to attach the written appraisals 
to the return only for contributions of art valued at $20,000 or more, 
any deduction of more than $500,000, contributions of easements on 
buildings in historic districts, and deductions of more than $500 for 
clothing and household items not in good use condition. Charitable 
organizations that receive contributions listed in Section B of Form 
8283 generally must report them to IRS on Form 8282. 

Figure 2: Form 8283, Section B, Part I, Reporting Instructions for 
Noncash Charitable Contributions over $5,000: 

[Refer to PDF for image: excerpt from IRS Form 8283] 

Source: Adapted fro IRS form 8283 Noncash Charitable Contributions. 

[End of figure] 

Estate Tax Returns: 

IRS requires that taxpayers support the claimed value of property in 
estate transfers with an appraisal, which could be a written appraisal 
by a professional appraiser, but does not have to be in every 
situation. The body of law covering qualified appraisals for noncash 
charitable contributions does not apply to estate or gift taxes. 
Taxpayers may owe taxes on the property of an estate transferred at 
death, if the gross value of the estate exceeds annually established 
exclusion levels. The exclusion levels for the estates of those who 
died in certain recent years were $1.5 million for 2004 to 2005, $2 
million for 2006 to 2008, $3.5 million for 2009, and $5 million for 
2010 to 2012. Following taxpayers' deaths, appointed estate executors 
file estate returns on Form 706, United States Estate (and Generation-
Skipping Transfer) Tax Return if the estate is worth more than the 
annual exclusion. Appointed executors must include explanation or 
documentation detailing how the value of estate property was 
determined. Written appraisals prepared by professional appraisers are 
one of the acceptable valuation methods, and appropriate documentation 
will vary depending on the type of asset. However, written appraisals 
are required to support the value of real property claimed in Schedule 
A-1, artwork or collectibles worth more than $3,000 individually or 
more than $10,000 collectively claimed in Schedule F, and conservation 
easement exclusions reported in Schedule U. 

Gift Tax Returns: 

Taxpayers may be subject to taxes on property transferred as gifts and 
must provide valuation support for the property's claimed value. Gifts 
may be taxable if their value exceeds annually established exclusion 
values. The exclusion levels for gift transfers in recent years were 
$10,000 from 1998 to 2001, $11,000 from 2002 to 2005, $12,000 from 
2006 to 2008, and $13,000 from 2009 to the present. Gift donors file 
gift returns on Form 709, United States Gift (and Generation-Skipping 
Transfer) Tax Return, if gifts exceed the exclusion value. Donors must 
list taxable gifts in Schedule A and include one of a number of 
acceptable valuation documents, among them a written appraisal 
prepared by a professional appraiser, or an explanation of how the 
value was determined. For calendar year 2007, IRS recorded 257,485 
donors who transferred $45.2 billion in gifts. Less than 4 percent of 
all gift returns were taxable, accounting for $2.8 billion in gift 
taxes. Three types of assets--cash, stock, and real estate--accounted 
for 87 percent of all gifts. 

Penalty Thresholds and Valuation Misstatements: 

For noncash charitable contributions, the Pension Protection Act (PPA) 
of 2006 lowered the threshold for substantial valuation misstatements 
from 200 percent of the correct valuation to 150 percent. Substantial 
valuation misstatements subject the taxpayer to a penalty equal to 20 
percent of the underpayment attributable to the misstatement. For 
estate and gift property, PPA increased the threshold for substantial 
valuation understatements from 50 percent to 65 percent. Gross 
valuation misstatements on any return are subject to an increased 
penalty equal to 40 percent of the portion of the underpayment 
attributable to the misstatement. For noncash charitable 
contributions, PPA lowered the threshold for gross valuation 
misstatement from 400 percent of the correct valuation to 200 percent. 
For estate or gift property, PPA raised the threshold for gross 
valuation understatements from 25 percent to 40 percent of the 
supported value. 

[End of section] 

Appendix III: Tables on Appraisal Usage and IRS Appraisal Enforcement: 

Tables 2 through 12 contain data on appraisal usage and IRS's 
appraisal enforcement. 

Table 2: Number of Estate Tax Returns Filed in 2007 through 2009, by 
Likeliness of Having a Valuation Done by an Appraiser: 

Estate tax returns filed in 2009[A]: 

Returns with over $50,000 in any asset, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 30,500; 
Lower bound of 95 percent confidence interval: 30,200; 
Upper bound of 95 percent confidence interval: 30,800. 

Returns with no more than $50,000 in every asset, deduction, or 
exclusion category likely to involve an appraiser; 
Estimate: 900; 
Lower bound of 95 percent confidence interval: 700; 
Upper bound of 95 percent confidence interval: 1,200. 

Returns that could not be classified into either of the preceding 
groups; 
Estimate: 800; 
Lower bound of 95 percent confidence interval: 600; 
Upper bound of 95 percent confidence interval: 1,000. 

Estate tax returns filed in 2008: 

Returns with over $50,000 in any asset, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 34,800; 
Lower bound of 95 percent confidence interval: 34,600; 
Upper bound of 95 percent confidence interval: 35,100. 

Returns with no more than $50,000 in every asset, deduction, or 
exclusion category likely to involve an appraiser; 
Estimate: 1,000; 
Lower bound of 95 percent confidence interval: 900; 
Upper bound of 95 percent confidence interval: 1,200. 

Returns that could not be classified into either of the preceding 
groups; 
Estimate: 1,200; 
Lower bound of 95 percent confidence interval: 1,000; 
Upper bound of 95 percent confidence interval: 1,400. 

Estate tax returns filed in 2007: 

Returns with over $50,000 in any asset, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 34,000; 
Lower bound of 95 percent confidence interval: 33,700; 
Upper bound of 95 percent confidence interval: 34,300. 

Returns with no more than $50,000 in every asset, deduction, or 
exclusion category likely to involve an appraiser; 
Estimate: 1,400; 
Lower bound of 95 percent confidence interval: 1,200; 
Upper bound of 95 percent confidence interval: 1,600. 

Returns that could not be classified into either of the preceding 
groups; 
Estimate: 1,400; 
Lower bound of 95 percent confidence interval: 1,200; 
Upper bound of 95 percent confidence interval: 1,600. 

Source: GAO analysis of IRS data. 

[A] IRS reports that 33,515 estate tax returns were filed in 2009; 
38,354 in 2008; and 38,000 in 2007. 

[End of table] 

Table 3: Absolute Value of Assets, Deductions, and Exclusions Reported 
on Estate Tax returns, by Likeliness of Having a Valuation Done by an 
Appraiser: 

All items reported in 2009: 
Estimate: $257.0 billion; 
Lower bound of 95 percent confidence interval: $255.0 billion; 
Upper bound of 95 percent confidence interval: $259.0 billion. 

Items likely to involve an appraiser; 
Estimate: $76.8 billion; 
Lower bound of 95 percent confidence interval: $75.6 billion; 
Upper bound of 95 percent confidence interval: $78.1 billion. 

Items unlikely to involve an appraiser; 
Estimate: $93.2 billion; 
Lower bound of 95 percent confidence interval: $92.0 billion; 
Upper bound of 95 percent confidence interval: $94.5 billion. 

Items for which appraiser involvement is indeterminable; 
Estimate: $86.9 billion; 
Lower bound of 95 percent confidence interval: $85.2 billion; 
Upper bound of 95 percent confidence interval: $88.5 billion. 

All items reported in 2008: 
Estimate: $294.3 billion; 
Lower bound of 95 percent confidence interval: $292.6 billion; 
Upper bound of 95 percent confidence interval: $296.1 billion. 

Items likely to involve an appraiser; 
Estimate: $87.0 billion; 
Lower bound of 95 percent confidence interval: $85.8 billion; 
Upper bound of 95 percent confidence interval: $88.1 billion. 

Items unlikely to involve an appraiser; 
Estimate: $109.7 billion; 
Lower bound of 95 percent confidence interval: $108.6 billion; 
Upper bound of 95 percent confidence interval: $110.8 billion. 

Items for which appraiser involvement is indeterminable; 
Estimate: $97.7 billion; 
Lower bound of 95 percent confidence interval: $96.3 billion; 
Upper bound of 95 percent confidence interval: $99.1 billion. 

All items reported in 2007: 
Estimate: $278.4 billion; 
Lower bound of 95 percent confidence interval: $276.6 billion; 
Upper bound of 95 percent confidence interval: $280.2 billion. 

Items likely to involve an appraiser; 
Estimate: $83.0 billion; 
Lower bound of 95 percent confidence interval: $81.8 billion; 
Upper bound of 95 percent confidence interval: $84.2 billion. 

Items unlikely to involve an appraiser; 
Estimate: $104.8 billion; 
Lower bound of 95 percent confidence interval: $103.6 billion; 
Upper bound of 95 percent confidence interval: $106.0 billion. 

Items for which appraiser involvement is indeterminable; 
Estimate: $90.6 billion; 
Lower bound of 95 percent confidence interval: $89.1 billion; 
Upper bound of 95 percent confidence interval: $92.1 billion. 

Source: GAO analysis of IRS data. 

Note: Dollar figures have been adjusted for inflation to 2012 dollars 
using the U.S. GDP deflator. Detail may not sum to total because of 
rounding. 

[End of table] 

Table 4: Number of Gift Tax Returns Filed in 2007 through 2009, by 
Likeliness of Having a Valuation Done by an Appraiser: 

Gift tax returns filed in 2009[A]: 

Returns with over $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 38,200; 
Lower bound of 95 percent confidence interval: 34,200; 
Upper bound of 95 percent confidence interval: 42,200. 

Returns with no more than $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 196,300; 
Lower bound of 95 percent confidence interval: 196,000; 
Upper bound of 95 percent confidence interval: 196,500. 

Returns that could not be classified into either of the preceding 
groups; 
Estimate: 200; 
Lower bound of 95 percent confidence interval: 100; 
Upper bound of 95 percent confidence interval: 500. 

Gift tax returns filed in 2008: 

Returns with over $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 43,700; 
Lower bound of 95 percent confidence interval: 37,300; 
Upper bound of 95 percent confidence interval: 50,000. 

Returns with no more than $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 213,300; 
Lower bound of 95 percent confidence interval: 212,900; 
Upper bound of 95 percent confidence interval: 213,500. 

Returns that could not be classified into either of the preceding 
groups; 
Estimate: 600; 
Lower bound of 95 percent confidence interval: 300; 
Upper bound of 95 percent confidence interval: 900. 

Gift tax returns filed in 2007: 

Returns with over $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 41,200; 
Lower bound of 95 percent confidence interval: 38,600; 
Upper bound of 95 percent confidence interval: 43,800. 

Returns with no more than $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 201,700; 
Lower bound of 95 percent confidence interval: 201,200; 
Upper bound of 95 percent confidence interval: 202,100. 

Returns that could not be classified into either of the preceding 
groups; 
Estimate: 800; 
Lower bound of 95 percent confidence interval: 400; 
Upper bound of 95 percent confidence interval: 1,300. 

Source: GAO analysis of IRS data. 

[A] IRS reports that 234,714 gift tax returns were filed in 2009; 
257,485 in 2008; and 243,686 in 2007. 

[End of table] 

Table 5: Absolute Value of Assets, Deductions, and Exclusions Reported 
on Gift Tax Returns, by Likeliness of Having a Valuation Done by an 
Appraiser: 

All items reported in 2009; 
Estimate: $40.0 billion; 
Lower bound of 95 percent confidence interval: $39.4 billion; 
Upper bound of 95 percent confidence interval: $40.5 billion. 

Items likely to involve an appraiser; 
Estimate: $14.0 billion; 
Lower bound of 95 percent confidence interval: $13.4 billion; 
Upper bound of 95 percent confidence interval: $14.7 billion. 

Items unlikely to involve an appraiser; 
Estimate: $24.7 billion; 
Lower bound of 95 percent confidence interval: $24.0 billion; 
Upper bound of 95 percent confidence interval: $25.3 billion. 

Items for which appraiser involvement is indeterminable; 
Estimate: $1.3 billion; 
Lower bound of 95 percent confidence interval: $1.1 billion; 
Upper bound of 95 percent confidence interval: $1.4 billion. 

All items reported in 2008; 
Estimate: $45.1 billion; 
Lower bound of 95 percent confidence interval: $44.3 billion; 
Upper bound of 95 percent confidence interval: $45.8 billion. 

Items likely to involve an appraiser; 
Estimate: $15.0 billion; 
Lower bound of 95 percent confidence interval: $14.3 billion; 
Upper bound of 95 percent confidence interval: $15.7 billion. 

Items unlikely to involve an appraiser; 
Estimate: $29.2 billion; 
Lower bound of 95 percent confidence interval: $28.4 billion; 
Upper bound of 95 percent confidence interval: $30.0 billion. 

Items for which appraiser involvement is indeterminable; 
Estimate: $0.9 billion; 
Lower bound of 95 percent confidence interval: $0.8 billion; 
Upper bound of 95 percent confidence interval: $1.0 billion. 

All items reported in 2007; 
Estimate: $38.9 billion; 
Lower bound of 95 percent confidence interval: $38.5 billion; 
Upper bound of 95 percent confidence interval: $39.3 billion. 

Items likely to involve an appraiser; 
Estimate: $14.0 billion; 
Lower bound of 95 percent confidence interval: $13.5 billion; 
Upper bound of 95 percent confidence interval: $14.5 billion. 

Items unlikely to involve an appraiser; 
Estimate: $24.2 billion; 
Lower bound of 95 percent confidence interval: $23.7 billion; 
Upper bound of 95 percent confidence interval: $24.7 billion. 

Items for which appraiser involvement is indeterminable; 
Estimate: $0.7 billion; 
Lower bound of 95 percent confidence interval: $0.6 billion; 
Upper bound of 95 percent confidence interval: $0.8 billion. 

Source: GAO analysis of IRS data. 

Note: Dollar figures have been adjusted for inflation to 2012 dollars 
using the U.S. GDP deflator. Detail may not sum to total because of 
rounding. 

[End of table] 

Table 6: Number of Taxpayers Reporting Amounts in Section B of Form 
8283 in 2005 through 2008, by Likeliness of Needing a Qualified 
Appraisal: 

All 2008 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 76,000; 
Lower bound of 95 percent confidence interval: 76,000; 
Upper bound of 95 percent confidence interval: 76,000. 

Returns identifiable as likely to involve a qualified appraisal; 
Estimate: 21,900; 
Lower bound of 95 percent confidence interval: 16,200; 
Upper bound of 95 percent confidence interval: 27,600. 

Returns identifiable as unlikely to involve a qualified appraisal; 
Estimate: 5,900; 
Lower bound of 95 percent confidence interval: 3,500; 
Upper bound of 95 percent confidence interval: 9,300. 

Returns whose likeliness could not be determined; 
Estimate: 48,200; 
Lower bound of 95 percent confidence interval: 37,400; 
Upper bound of 95 percent confidence interval: 58,900. 

All 2007 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 72,700; 
Lower bound of 95 percent confidence interval: 72,600; 
Upper bound of 95 percent confidence interval: 72,700. 

Returns identifiable as likely to involve a qualified appraisal; 
Estimate: 19,400; 
Lower bound of 95 percent confidence interval: 15,100; 
Upper bound of 95 percent confidence interval: 23,800. 

Returns identifiable as unlikely to involve a qualified appraisal; 
Estimate: 12,000; 
Lower bound of 95 percent confidence interval: 8,400; 
Upper bound of 95 percent confidence interval: 16,200. 

Returns whose likeliness could not be determined; 
Estimate: 41,300; 
Lower bound of 95 percent confidence interval: 31,900; 
Upper bound of 95 percent confidence interval: 50,600. 

All 2006 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 73,500; 
Lower bound of 95 percent confidence interval: 73,500; 
Upper bound of 95 percent confidence interval: 73,500. 

Returns identifiable as likely to involve a qualified appraisal; 
Estimate: 24,800; 
Lower bound of 95 percent confidence interval: 18,300; 
Upper bound of 95 percent confidence interval: 31,200. 

Returns identifiable as unlikely to involve a qualified appraisal; 
Estimate: 7,000; 
Lower bound of 95 percent confidence interval: 5,300; 
Upper bound of 95 percent confidence interval: 9,100. 

Returns whose likeliness could not be determined; 
Estimate: 41,800; 
Lower bound of 95 percent confidence interval: 32,500; 
Upper bound of 95 percent confidence interval: 51,100. 

All 2005 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 56,900; 
Lower bound of 95 percent confidence interval: 56,800; 
Upper bound of 95 percent confidence interval: 56,900. 

Returns identifiable as likely to involve a qualified appraisal; 
Estimate: 22,400; 
Lower bound of 95 percent confidence interval: 17,400; 
Upper bound of 95 percent confidence interval: 27,400. 

Returns identifiable as unlikely to involve a qualified appraisal; 
Estimate: 7,400; 
Lower bound of 95 percent confidence interval: 5,400; 
Upper bound of 95 percent confidence interval: 9,800. 

Returns whose likeliness could not be determined; 
Estimate: 27,000; 
Lower bound of 95 percent confidence interval: 19,900; 
Upper bound of 95 percent confidence interval: 34,200. 

Source: GAO analysis of IRS data. 

Note: Detail may not sum to total because of rounding. 

[End of table] 

Table 7: Value of Deductions Reported in Section B of Form 8283 in 
2005 through 2008, by Likeliness of Taxpayer Needing at Least One 
Qualified Appraisal: 

Amounts reported on all 2008 returns with more than $5,000 in 
deductions for noncash contributions carried from Section B of Form 
8283; 
Estimate: $8.8 billion; 
Lower bound of 95 percent confidence interval: $7.8 billion; 
Upper bound of 95 percent confidence interval: $9.9 billion. 

Returns identifiable as likely to involve a qualified appraisal; 
Estimate: $6.3 billion; 
Lower bound of 95 percent confidence interval: $5.3 billion; 
Upper bound of 95 percent confidence interval: $7.4 billion. 

Returns identifiable as unlikely to involve a qualified appraisal; 
Estimate: $1.0 billion; 
Lower bound of 95 percent confidence interval: $0.9 billion; 
Upper bound of 95 percent confidence interval: $1.1 billion. 

Returns whose likeliness could not be determined; 
Estimate: $1.5 billion; 
Lower bound of 95 percent confidence interval: $1.3 billion; 
Upper bound of 95 percent confidence interval: $1.7 billion. 

Amounts reported on all 2007 returns with more than $5,000 in 
deductions for noncash contributions carried from Section B of Form 
8283; 
Estimate: $14.6 billion; 
Lower bound of 95 percent confidence interval: $10.4 billion; 
Upper bound of 95 percent confidence interval: $18.7 billion. 

Returns identifiable as likely to involve a qualified appraisal; 
Estimate: $10.6 billion; 
Lower bound of 95 percent confidence interval: $6.8 billion; 
Upper bound of 95 percent confidence interval: $14.3 billion. 

Returns identifiable as unlikely to involve a qualified appraisal; 
Estimate: 1.7 billion; 
Lower bound of 95 percent confidence interval: $1.5 billion; 
Upper bound of 95 percent confidence interval: $1.8 billion. 

Returns whose likeliness could not be determined; 
Estimate: $2.4 billion; 
Lower bound of 95 percent confidence interval: $0.6 billion; 
Upper bound of 95 percent confidence interval: $4.1 billion. 

Amounts reported on all 2006 returns with more than $5,000 in 
deductions for noncash contributions carried from section B of form 
8283; 
Estimate: $12.6 billion; 
Lower bound of 95 percent confidence interval: $11.8 billion; 
Upper bound of 95 percent confidence interval: $13.4 billion. 

Returns identifiable as likely to involve a qualified appraisal; 
Estimate: $8.4 billion; 
Lower bound of 95 percent confidence interval: $7.6 billion; 
Upper bound of 95 percent confidence interval: $9.1 billion. 

Returns identifiable as unlikely to involve a qualified appraisal; 
Estimate: $2.9 billion; 
Lower bound of 95 percent confidence interval: $2.8 billion; 
Upper bound of 95 percent confidence interval: $3.1 billion. 

Returns whose likeliness could not be determined; 
Estimate: $1.3 billion; 
Lower bound of 95 percent confidence interval: $1.1 billion; 
Upper bound of 95 percent confidence interval: $1.5 billion. 

Amounts reported on all 2005 returns with more than $5,000 in 
deductions for noncash contributions carried from section B of form 
8283; 
Estimate: $11.6 billion; 
Lower bound of 95 percent confidence interval: $10.0 billion; 
Upper bound of 95 percent confidence interval: $13.1 billion. 

Returns identifiable as likely to involve a qualified appraisal; 
Estimate: $9.0 billion; 
Lower bound of 95 percent confidence interval: $7.5 billion; 
Upper bound of 95 percent confidence interval: $10.6 billion. 

Returns identifiable as unlikely to involve a qualified appraisal; 
Estimate: $1.2 billion; 
Lower bound of 95 percent confidence interval: $1.0 billion; 
Upper bound of 95 percent confidence interval: $1.3 billion. 

Returns whose likeliness could not be determined; 
Estimate: $1.4 billion; 
Lower bound of 95 percent confidence interval: $1.1 billion; 
Upper bound of 95 percent confidence interval: $1.7 billion. 

Source: GAO analysis of IRS data. 

Note: Dollar figures have been adjusted for inflation to 2012 dollars 
using the U.S. GDP deflator. Detail may not sum to total because of 
rounding. 

[End of table] 

Table 8: Audit Rates for Estate Tax Returns Filed in 2007 through 
2009, by Likeliness of Having a Valuation Done by an Appraiser: 

All returns filed in 2009[A]: 

Returns with over $50,000 in any asset, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 10.9%; 
Lower bound of 95 percent confidence interval: 9.9%; 
Upper bound of 95 percent confidence interval: 12.0%. 

Returns with no more than $50,000 in every category likely to involve 
an appraiser; 
Estimate: 19.0%; 
Lower bound of 95 percent confidence interval: 10.9%; 
Upper bound of 95 percent confidence interval: 29.7%. 

All taxable or near taxable returns; 
Estimate: 11.2%; 
Lower bound of 95 percent confidence interval: 10.2%; 
Upper bound of 95 percent confidence interval: 12.3%. 

All returns with estate values more than $100,000 below the taxable 
level; 
Estimate: 0.5%; 
Lower bound of 95 percent confidence interval: 0.1%; 
Upper bound of 95 percent confidence interval: 13.2%. 

Taxable or near taxable returns with over $50,000 in any category 
likely to involve an appraiser; 
Estimate: 11.0%; 
Lower bound of 95 percent confidence interval: 9.9%; 
Upper bound of 95 percent confidence interval: 12.1%. 

All returns filed in 2008: 

Returns with over $50,000 in any asset, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 10.6%; 
Lower bound of 95 percent confidence interval: 9.9%; 
Upper bound of 95 percent confidence interval: 11.3%. 

Returns with no more than $50,000 in every category likely to involve 
an appraiser; 
Estimate: 11.9%; 
Lower bound of 95 percent confidence interval: 7.5%; 
Upper bound of 95 percent confidence interval: 17.6%. 

All taxable or near taxable returns; 
Estimate: 10.8%; 
Lower bound of 95 percent confidence interval: 10.0%; 
Upper bound of 95 percent confidence interval: 11.5%. 

All returns with estate values more than $100,000 below the taxable 
level; 
Estimate: 0.5%; 
Lower bound of 95 percent confidence interval: 0.0%; 
Upper bound of 95 percent confidence interval: 3.8%. 

Taxable or near taxable returns with over $50,000 in any category 
likely to involve an appraiser; 
Estimate: 10.8%; 
Lower bound of 95 percent confidence interval: 10.1%; 
Upper bound of 95 percent confidence interval: 11.6%. 

All returns filed in 2007: 

Returns with over $50,000 in any asset, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 7.6%; 
Lower bound of 95 percent confidence interval: 7.0%; 
Upper bound of 95 percent confidence interval: 8.2%. 

Returns with no more than $50,000 in every category likely to involve 
an appraiser; 
Estimate: 5.9%; 
Lower bound of 95 percent confidence interval: 2.7%; 
Upper bound of 95 percent confidence interval: 11.0%. 

All taxable or near taxable returns; 
Estimate: 8.2%; 
Lower bound of 95 percent confidence interval: 7.5%; 
Upper bound of 95 percent confidence interval: 8.9%. 

All returns with estate values more than $100,000 below the taxable 
level; 
Estimate: 0.9%; 
Lower bound of 95 percent confidence interval: 0.3%; 
Upper bound of 95 percent confidence interval: 1.9%. 

Taxable or near taxable returns with over $50,000 in any category 
likely to involve an appraiser; 
Estimate: 8.3%; 
Lower bound of 95 percent confidence interval: 7.6%; 
Upper bound of 95 percent confidence interval: 9.0%. 

Source: GAO analysis of IRS data. 

[A] IRS reports that the audit rate for all estate tax returns filed 
in 2009 was 10.1 percent. The audit rates for 2008 and 2007 were 9.3 
and 8.1 percent, respectively. 

[End of table] 

Table 9: Audit Rates for Gift Tax Returns Filed in 2007 through 2009, 
by Likeliness of Having a Valuation Done by an Appraiser: 

All returns filed in 2009[A]: 

Returns with over $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 0.8%; 
Lower bound of 95 percent confidence interval: 0.5%; 
upper Bound of 95 percent confidence interval: 1.3%. 

Returns with no more than $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 0.1%; 
Lower bound of 95 percent confidence interval: 0.0%; 
upper Bound of 95 percent confidence interval: 0.2%. 

All returns filed in 2008: 

Returns with over $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 1.3%; 
Lower bound of 95 percent confidence interval: 0.9%; 
upper Bound of 95 percent confidence interval: 1.8%. 

Returns with no more than $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 0.1%; 
Lower bound of 95 percent confidence interval: 0.0%; 
upper Bound of 95 percent confidence interval: 0.2%. 

All returns filed in 2007: 

Returns with over $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 1.1%; 
Lower bound of 95 percent confidence interval: 0.8%; 
upper Bound of 95 percent confidence interval: 1.6%. 

Returns with no more than $25,000 in any gift, deduction, or exclusion 
category likely to involve an appraiser; 
Estimate: 0.2%; 
Lower bound of 95 percent confidence interval: 0.1%; 
upper Bound of 95 percent confidence interval: 0.3%. 

Source: GAO analysis of IRS data. 

[A] IRS reports that the audit rate for all gift tax returns filed in 
2009 was 0.7 percent. The audit rates for 2008 and 2007 were 0.6 and 
0.4 percent, respectively. 

[End of table] 

Table 10: Audit Rates for Taxpayers Reporting Amounts in Section B of 
Form 8283 in 2005 through 2008, by Likeliness of Needing a Qualified 
Appraisal: 

All 2008 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 1.4%; 
Lower bound of 95 percent confidence interval: 0.3%; 
Upper bound of 95 percent confidence interval: 3.7%. 

Returns likely to involve a qualified appraisal; 
Estimate: 3.2%; 
Lower bound of 95 percent confidence interval: 0.3%; 
Upper bound of 95 percent confidence interval: 12.0%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 1.5%; 
Lower bound of 95 percent confidence interval: 0.3%; 
Upper bound of 95 percent confidence interval: 3.9%. 

Returns with adjusted gross income under $200,000; 
Estimate: 0.3%; 
Lower bound of 95 percent confidence interval: 0.0%; 
Upper bound of 95 percent confidence interval: 1.3%. 

Returns with adjusted gross income above or equal to $200,000; 
Estimate: 3.5%; 
Lower bound of 95 percent confidence interval: 0.7%; 
Upper bound of 95 percent confidence interval: 9.9%. 

All 2007 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 4.1%; 
Lower bound of 95 percent confidence interval: 2.2%; 
Upper bound of 95 percent confidence interval: 6.7%. 

Returns likely to involve a qualified appraisal; 
Estimate: 4.2%; 
Lower bound of 95 percent confidence interval: 2.0%; 
Upper bound of 95 percent confidence interval: 7.6%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 1.7%; 
Lower bound of 95 percent confidence interval: 0.8%; 
Upper bound of 95 percent confidence interval: 3.2%. 

Returns with adjusted gross income under $200,000; 
Estimate: 0.5%; 
Lower bound of 95 percent confidence interval: 0.0%; 
Upper bound of 95 percent confidence interval: 2.9%. 

Returns with adjusted gross income above or equal to $200,000; 
Estimate: 7.4%; 
Lower bound of 95 percent confidence interval: 4.1%; 
Upper bound of 95 percent confidence interval: 12.2%. 

All 2006 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 2.8%; 
Lower bound of 95 percent confidence interval: 1.4%; 
Upper bound of 95 percent confidence interval: 4.9%. 

Returns likely to involve a qualified appraisal; 
Estimate: 2.2%; 
Lower bound of 95 percent confidence interval: 1.0%; 
Upper bound of 95 percent confidence interval: 4.0%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 7.0%; 
Lower bound of 95 percent confidence interval: 1.0%; 
Upper bound of 95 percent confidence interval: 21.8%. 

Returns with adjusted gross income under $200,000; 
Estimate: 1.8%; 
Lower bound of 95 percent confidence interval: 0.4%; 
Upper bound of 95 percent confidence interval: 5.1%. 

Returns with adjusted gross income above or equal to $200,000; 
Estimate: 4.4%; 
Lower bound of 95 percent confidence interval: 2.2%; 
Upper bound of 95 percent confidence interval: 7.8%. 

All 2005 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 2.0%; 
Lower bound of 95 percent confidence interval: 1.2%; 
Upper bound of 95 percent confidence interval: 3.1%. 

Returns likely to involve a qualified appraisal; 
Estimate: 2.4%; 
Lower bound of 95 percent confidence interval: 1.2%; 
Upper bound of 95 percent confidence interval: 4.3%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 0.4%; 
Lower bound of 95 percent confidence interval: 0.1%; 
Upper bound of 95 percent confidence interval: 1.3%. 

Returns with adjusted gross income under $200,000; 
Estimate: 0.5%; 
Lower bound of 95 percent confidence interval: 0.0%; 
Upper bound of 95 percent confidence interval: 2.9%. 

Returns with adjusted gross income above or equal to $200,000; 
Estimate: 3.4%; 
Lower bound of 95 percent confidence interval: 2.1%; 
Upper bound of 95 percent confidence interval: 5.4%. 

Source: GAO analysis of IRS data. 

[End of table] 

Table 11: Rates of Audit That Included Noncash Contributions as an 
Issue for Taxpayers Reporting Amounts in Section B of Form 8283 in 
2005 through 2008, by Likeliness of Needing a Qualified Appraisal: 

All 2008 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 0.2%; 
Lower bound of 95 percent confidence interval: 0.1%; 
Upper bound of 95 percent confidence interval: 0.5%. 

Returns likely to involve a qualified appraisal; 
Estimate: 0.4%; 
Lower bound of 95 percent confidence interval: 0.1%; 
Upper bound of 95 percent confidence interval: 1.3%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 0.8%; 
Lower bound of 95 percent confidence interval: 0.0%; 
Upper bound of 95 percent confidence interval: 3.7%. 

All 2007 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 1.2%; 
Lower bound of 95 percent confidence interval: 0.6%; 
Upper bound of 95 percent confidence interval: 2.1%. 

Returns likely to involve a qualified appraisal; 
Estimate: 1.0%; 
Lower bound of 95 percent confidence interval: 0.6%; 
Upper bound of 95 percent confidence interval: 1.7%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 1.1%; 
Lower bound of 95 percent confidence interval: 0.3%; 
Upper bound of 95 percent confidence interval: 2.6%. 

All 2006 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 1.5%; 
Lower bound of 95 percent confidence interval: 0.4%; 
Upper bound of 95 percent confidence interval: 3.7%. 

Returns likely to involve a qualified appraisal; 
Estimate: 0.6%; 
Lower bound of 95 percent confidence interval: 0.2%; 
Upper bound of 95 percent confidence interval: 1.3%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 4.5%; 
Lower bound of 95 percent confidence interval: 0.2%; 
Upper bound of 95 percent confidence interval: 21.3%. 

All 2005 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 0.7%; 
Lower bound of 95 percent confidence interval: 0.3%; 
Upper bound of 95 percent confidence interval: 1.3%. 

Returns likely to involve a qualified appraisal; 
Estimate: 0.5%; 
Lower bound of 95 percent confidence interval: 0.3%; 
Upper bound of 95 percent confidence interval: 1.0%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 0.1%; 
Lower bound of 95 percent confidence interval: 0.0%; 
Upper bound of 95 percent confidence interval: 0.9%. 

Source: GAO analysis of IRS data. 

[End of table] 

Table 12: No-Change Rates for Audit That Included Noncash 
Contributions as an Issue for Taxpayers Reporting Amounts in Section B 
of Form 8283 in 2005 through 2008, by Likeliness of Needing a 
Qualified Appraisal: 

All 2008 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 72.2%; 
Lower bound of 95 percent confidence interval: 20.6%; 
Upper bound of 95 percent confidence interval: 98.6%. 

Returns likely to involve a qualified appraisal; 
Estimate: 56.2%; 
Lower bound of 95 percent confidence interval: 0.0%; 
Upper bound of 95 percent confidence interval: 98.2%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 100.0%; 
Lower bound of 95 percent confidence interval: 60.7%; 
Upper bound of 95 percent confidence interval: 100.0%. 

All 2007 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 88.0%; 
Lower bound of 95 percent confidence interval: 72.0%; 
Upper bound of 95 percent confidence interval: 96.7%. 

Returns likely to involve a qualified appraisal; 
Estimate: 62.1%; 
Lower bound of 95 percent confidence interval: 32.1%; 
Upper bound of 95 percent confidence interval: 86.5%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 86.2%; 
Lower bound of 95 percent confidence interval: 59.6%; 
Upper bound of 95 percent confidence interval: 98.1%. 

All 2006 returns with more than $5,000 in deductions for noncash 
contributions carried from Section B of Form 8283; 
Estimate: 37.3%; 
Lower bound of 95 percent confidence interval: 3.3%; 
Upper bound of 95 percent confidence interval: 86.4%. 

Returns likely to involve a qualified appraisal; 
Estimate: 56.6%; 
Lower bound of 95 percent confidence interval: 15.3%; 
Upper bound of 95 percent confidence interval: 91.7%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 99.4%; 
Lower bound of 95 percent confidence interval: 58.7%; 
Upper bound of 95 percent confidence interval: 99.8%. 

All 2005 returns with more than $5,000 in deductions for noncash 
contributions carried from section B of form 8283; 
Estimate: 35.8%; 
Lower bound of 95 percent confidence interval: 11.5%; 
Upper bound of 95 percent confidence interval: 67.1%. 

Returns likely to involve a qualified appraisal; 
Estimate: 63.3%; 
Lower bound of 95 percent confidence interval: 46.7%; 
Upper bound of 95 percent confidence interval: 77.9%. 

Returns unlikely to involve a qualified appraisal; 
Estimate: 100.0%; 
Lower bound of 95 percent confidence interval: 65.2%; 
Upper bound of 95 percent confidence interval: 100.0%. 

Source: GAO analysis of IRS data. 

[End of table] 

[End of section] 

Appendix IV: Comments from the Internal Revenue Service: 

Department of The Treasury: 
Deputy Commissioner: 
Internal Revenue Service: 
Washington, D.C. 20224: 

Mr. James R. White: 
Director, Tax Issues: 
Strategic Issues Team: 
U.S. Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. White: 

Thank you for the opportunity to review your draft report entitled, 
"Appraised Values on Tax Returns—Burdens Taxpayers Could Be Reduced, 
Selected Practices Improved” (GAO 12-608, Job Code 450869). 

We are pleased your report acknowledges that the Service's Engineering 
staff has complied with the recommendations from your prior audits, 
such as ensuring its staff is qualified and properly monitors 
performance quality. We appreciate that your report recognizes that 
Appeals provides a significant amount of continuing education per year 
for its employees, including the Art Appraisal Service (AAS) staff. 
The IRS agrees that a more comprehensive quality review process is 
appropriate for the AAS staff. We also agree that more specific and 
documented appraisal training should be provided. 

The enclosed response addresses each recommendation separately. 

If you have questions, please contact me, or a member of your staff 
may contact Faris Fink, Commissioner, Small Business/Self-Employed 
Division at 202-622-0600. 

Sincerely, 

Signed by: 

Steven T. Miller: 
Deputy Commissioner for Services and Enforcement: 

Enclosure: 

[End of letter] 

Enclosure: 

GAO Recommendations and IRS Responses to GAO Draft Report: 
Appraised Values on Tax Returns: Burdens on Taxpayers Could Be
Reduced, Selected Practices Improved GA0-12-608: 

Recommendation 1: Ensure that a more comprehensive quality review 
process for work performed by Art Appraisal Service staff is 
implemented. 

Comments: We agree that a more comprehensive quality review process is
appropriate for AAS. The IRS's Director of Tax Policy and Valuation is 
taking steps to supplement Appeals Quality Measurement System's (AQMS) 
random sample with a periodic targeted review of AAS cases. IRS's goal 
is to start the review in fiscal year 2013. 

Recommendation 2: Develop more specific and documented appraisal 
training requirements for Art Appraisal Service staff, as Large 
Business & International has done for engineers. 

Comments: As noted in the report, Appeals provides 40 hours of 
continuing education per year for its employees, including its MS 
staff, which includes NYU's Art Law Day, and national conferences of 
the appraiser societies. However, we are also finalizing a more 
specific and documented training curriculum for AAS appraisers that 
will address the concerns raised in the report. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. White, (202) 512-9110 or whitej@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, James Wozny, Assistant 
Director; Anthony Bova; Michael Brostek; Sara Daleski; Eric Gorman; 
Suzanne Heimbach; Karen O'Conor; Melanie Papasian; Albert Sim; Sabrina 
Streagle; Karen Villafana; and William Woods made key contributions to 
this report. 

[End of section] 

Footnotes: 

[1] A conservation easement represents a contractual agreement between 
the property owner and a charitable organization receiving the 
easement to preserve the property. 

[2] United States v. McClain, Civil No. 11-1087 (D.D.C. July 13, 2011) 
(stipulated order of permanent injunction). 

[3] Pub. L. No. 109-280, 120 Stat. 780 (2006). According to the law, 
qualified appraisers must have an appraisal designation from a 
recognized appraisal organization or meet education requirements set 
by the Secretary of the Treasury, regularly perform appraisals, and 
meet other standards set by the Secretary of the Treasury. IRC 
§170(f)(11)(E)(ii). 

[4] Pub. L. No. 110-172, 121 Stat. 2473 (2007). 

[5] See appendix I for a detailed description of this analysis. We 
used different time periods because of differences in the availability 
of data from SOI. 

[6] I.R.C. §170(f)(11)(E)(i) and §170(f)(11)(E)(ii). There is no 
single, universally accepted set of appraisal standards that apply to 
every situation in which an appraisal might be used, but some 
professional appraiser associations have adopted standards with 
similar principles, such as a code of ethics, valuation approaches and 
methods, and guidelines for developing appraisal reports. One set of 
standards is the Uniform Standards of Professional Appraisal Practice 
(USPAP), which an IRS notice on appraisal requirements cites as an 
example. Among other things, the USPAP set ethics and competency 
rules, and established standards for the development of appraisals of 
real property, personal property, and business assets. 

[7] The PPA did not specify what constituted a recognized professional 
organization, but professional associations, such as the American 
Society of Appraisers and the National Association of Certified 
Valuation Analysts, provide professional training, certification, and 
accreditation programs. 

[8] The $5,000 threshold was established by Congress in 1984. 

[9] In this report we use "appraisal" to mean a valuation made for 
estate or gift tax purposes by a professional appraiser or a qualified 
appraisal for purposes of noncash charitable contributions. 

[10] For more information on how the thresholds changed under the PPA, 
see appendix II. 

[11] The penalty on an appraiser would be the lesser of (1) the 
greater of $1,000 or 10 percent of the underpayment derived from the 
misstated appraisal or (2) 125 percent of the gross income received by 
the appraiser for preparing the appraisal. 

[12] A field examination typically involves IRS visiting the 
taxpayers' place of work or residence. 

[13] When discussing estate and gift taxes, an appraisal is a 
valuation conducted by a professional and may cover a different set of 
property than an appraisal for noncash contributions. A more detailed 
explanation of how we determined what types of property likely 
involved an appraiser is provided in appendix I. 

[14] See appendix III, table 9. 

[15] See appendix III, table 8. 

[16] See appendix III, table 10. 

[17] See appendix III, table 11. 

[18] The no-change rate was computed by first estimating (1) the 
number of cases where noncash contributions were included as an issue 
to be reviewed and (2) the number of those cases where an adjustment 
was made to the contribution and then dividing (2) by (1). 

[19] Partnerships and S corporations are "pass-through" entities, 
meaning that they are not subject to the corporate income tax. 
Instead, these entities' income, deductions, and credits are allocated 
to the partners or shareholders. 

[20] An "abatement" is an IRS decision to cancel or annul a tax 
assessment or penalty. 

[21] IRS guidance also instructs examiners who levy the PPA penalty to 
alert IRS's Office of Professional Responsibility (OPR) about willful 
violations of the incorrect appraisals provision of PPA. OPR has the 
authority to impose disciplinary sanctions, such as practitioner 
disbarment and disqualification, against professionals who practice 
before IRS, including appraisers, as described in Circular 230, the 
IRS publication that documents the regulations that professionals must 
follow to represent taxpayers before IRS. 

[22] I.R.C. § 6700; I.R.C. § 6701. 

[23] Donees disposing of contributed assets within three years of the 
date of receipt must report contributions on Form 8282, with some 
exceptions, such as amounts received that are less than $500. IRS 
transcribes Form 8282 annually and electronically matches the amounts 
reported on the form with the total noncash contribution amounts that 
taxpayers report on Forms 1040, Schedule A. If there is a potential 
tax discrepancy of a certain amount the return is classified for 
potential examination. The classifier manually compares each Form 8282 
with the corresponding Form 8283 to further audit the discrepancy and 
identify the returns with issues that merit a full examination. 

[24] The figures cited here refer only to the returns chosen as part 
of the special project; IRS has audited other returns with façade and 
conservation easement issues. From 2007 through February 2012, SB/SE, 
alone, closed examinations on 3,384 returns reflecting deductions 
relating to conservation easements, which could involve reviews of 
appraisals. 

[25] We define "incorrectly filled out" as the form not having the 
required signatures from appraisers or donees. 

[26] Engineering employs other types of professional experts; however, 
for purposes of this report, references to the Engineering Department 
or engineers refer only to that group's appraisal experts. 

[27] IRS policy requires examiners to refer corporate returns with 
assets worth $10 million or more, and partnership returns with 11 or 
more partners and gross deductions greater than $1 million to 
Engineering. IRS policy also says that examiners should refer income 
tax returns with a valuation issue of $500,000 or more, and estate and 
gift tax returns with assets valued at $500,000 or more, or with a 
total tax of $1 million or more, to Engineering. IRS policy requires 
examiners to refer all cases selected for examination with art valued 
at $50,000 or more to AAS for review. 

[28] AAS also has access to a group of art experts, the Art Advisory 
Panel, which assists IRS in evaluating taxpayer-submitted art 
appraisals by reviewing the fair market values for art reported on 
estate, gift, and individual income tax returns. The panel is composed 
of prominent art experts, including museum directors, curators, and 
scholars. The panel makes recommendations on the acceptability of the 
submitted appraisals, and if it judges them to be unacceptable, makes 
alternative valuation recommendations for the art pieces. Following 
review by AAS, the Art Advisory Panel's recommendations on the value 
of appraised art property may become the position of IRS. 

[29] See GAO, Human Capital: A Self-Assessment Checklist for Agency 
Leaders, [hyperlink, http://www.gao.gov/products/GAO/OCG-00-14G] 
(Washington, D.C.: Sept. 1, 2000). 

[30] The CICs cover only those reviews that exceed planned staff days 
by 25 percent. 

[31] AQMS is a system used by Appeals management that randomly selects 
closed cases to review the quality of Appeals' work in the aggregate, 
not employee performance. 

[32] IRS Appeals officials also said that they consider the Art 
Advisory Panel an additional layer of quality review, as the panel 
reviews AAS work. 

[33] For purposes of the estate and gift tax components of our 
analysis, we define "appraisal" to mean any method used to support the 
value of an asset, exclusion, or deduction on an estate or gift tax 
return (this definition should not to be confused with the use of 
"qualified appraisal" in reference to noncash charitable 
contributions, which has a more specific legal meaning). We then 
further break down the term "appraisal" supporting an estate or gift 
tax return into two categories: simple and substantial. A simple 
appraisal consists of unsophisticated comparisons that would support 
the value of an asset, exclusion or deduction--such as referring to 
statements from a financial institution or to a published price for 
financial assets. A "substantial appraisal" involves a professional or 
independent expert using specialized knowledge or professional 
appraisal techniques to support an asset's value. 

[34] Individual taxpayers who have income or losses from businesses 
that they operate or from professions they practice must report the 
income or loss on Schedule C of Form 1040. 

[35] Given that we are concerned only with individual taxpayers, the 
only types of business inventories relevant to these deductions would 
be those of sole proprietorships (Schedule C) or partnerships. To the 
extent that any of the filers in our sample made only excepted 
contributions of inventories through a partnership our results will 
overstate the number of taxpayers requiring a qualified appraisal. 

[36] Similar items are those that fall under the same category or 
type, such as paintings, coin collections, jewelry, buildings, and 
nonpublicly traded stocks. 

[37] Securities with restrictions, even if they have readily available 
market quotations, may require qualified appraisals. 

[End of section] 

GAO’s Mission: 

The Government Accountability Office, the audit, evaluation, and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the 
performance and accountability of the federal government for the 
American people. GAO examines the use of public funds; evaluates 
federal programs and policies; and provides analyses, recommendations, 
and other assistance to help Congress make informed oversight, policy, 
and funding decisions. GAO’s commitment to good government is 
reflected in its core values of accountability, integrity, and 
reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO’s website [hyperlink, http://www.gao.gov]. Each 
weekday afternoon, GAO posts on its website newly released reports, 
testimony, and correspondence. To have GAO e-mail you a list of newly 
posted products, go to [hyperlink, http://www.gao.gov] and select “E-
mail Updates.” 

Order by Phone: 

The price of each GAO publication reflects GAO’s actual cost of 
production and distribution and depends on the number of pages in the 
publication and whether the publication is printed in color or black 
and white. Pricing and ordering information is posted on GAO’s 
website, [hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 
MasterCard, Visa, check, or money order. Call for additional 
information. 

Connect with GAO: 

Connect with GAO on facebook, flickr, twitter, and YouTube.
Subscribe to our RSS Feeds or E mail Updates. Listen to our Podcasts.
Visit GAO on the web at [hyperlink, http://www.gao.gov]. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 
Website: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]; 
E-mail: fraudnet@gao.gov; 
Automated answering system: (800) 424-5454 or (202) 512-7470. 

Congressional Relations: 

Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-4400
U.S. Government Accountability Office, 441 G Street NW, Room 7125
Washington, DC 20548. 

Public Affairs: 
Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149 
Washington, DC 20548.