Appraised Values on Tax Returns: Burdens on Taxpayers Could Be Reduced and Selected Practices Improved
Highlights
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.
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.
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 substantiallymisstated 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 itsappraisal experts are qualified.
To accomplish these objectives, GAO analyzed IRS data, reviewed IRS guidance, and interviewed appropriate IRS officials.
Recommendations
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.
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| 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. |
Open
|
No legislative action taken as of March 2024. The current appraisal threshold for certain contributions over $5,000 has existed since 1984. The absence of an inflation adjustment since then means that many contributors who pay for appraisals would not have needed to do so when the current threshold was first introduced. We continue to monitor for new legislation. . |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | To better ensure the quality of IRS's examination of appraisal issues, the Commissioner of Internal Revenue should ensure that a more comprehensive quality review system for work performed by AAS staff is implemented. |
Closed – Implemented
IRS developed a plan to supplement the Appeals Quality Measurement System (AQMS) random sample with a periodic targeted review of Art Appraisal Services (AAS) closed cases as described in IRM 8.1.7.1.2. The first such review involved Fiscal Year 2013 closed cases.
|
| Internal Revenue Service | To better ensure the quality of IRS's examination of appraisal issues, the Commissioner of Internal Revenue should develop more specific and documented appraisal training requirements for AAS staff, as LB&I has done for engineers. |
Closed – Implemented
IRS has developed more specific and documented appraisal training requirements for the Art Appraisal Services (AAS) appraisal staff.
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