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Through A Microscope - Look Who's Watching Now! (Part 1 of 3)

Aug 17, 2007
This article examines the impact on taxpayers and appraisers as well as their advisors of the new Federal provisions of the Pension Protection Act. For appraisers performing valuations for federal tax purposes in accordance with the Pension Protection Act (PPA), signed into law in August 2006, stipulates new penalties and stiff sanctions if the appraisers or appraisals fail to meet the new qualifications.

The Backdrop

The Congress and IRS, to safeguard the U.S. tax system and force taxpayers to straighten up, have introduced new rules and restrictions that impact lawyers and accountants as well as taxpayers. The Pension Protection Act (PPA) of 2006 establishes severe penalties for unethical conduct on the part of accountants involved in federal tax information consultancy to private firms.

Previously, the government's targets for tax abuse were various corporate transactions. But now it has trained its guns on the venerable charitable contribution deduction as well. The act attempts to prevent overvaluing the property given to charity to take advantage of the fair market value deduction. According to Section 170(f)(16)(B), Congress has invited the IRS to stop the deduction completely. In the middle of the gun battle are the appraisers who opine for the taxpayers about the values of property that they give to charity.

Qualified appraisers
PPA also requires that appraisals need to be prepared by qualified appraisers.1 A qualified appraiser is defined in the Act to mean a person who has earned an appraisal designation from a recognized professional organization or has met minimum education and experience requirements established by the Treasury Secretary through regulations. An appraiser will not be treated as a qualified appraiser unless the appraiser demonstrates verifiable education and experience for valuing the type of property subject to the appraisal. Also, the appraiser must not have been prohibited from practicing before the IRS at any time during a three-year period prior to the date of the appraisal.

To sum it up, it is now required that an appraiser valuing property for charitable deduction must be trained and experienced and a vague representation by the appraiser will no longer suffice.

Appraisal Impact on Charitable Contributions
PPA has led to an increase in mandatory requirements for appraisals and appraisers to meet Internal Revenue Code Section 170, which covers charitable requirements.

It is now required that all claimed deductions in excess of $5,000 must be accompanied by a "qualified appraisal." The regulations have duly defined the terms "qualified appraisal" and "qualified appraiser."

All appraisals to qualify must fully comply with Uniform Standards of Professional Appraisal Practice (USPAP). Those that do not fully comply but are "consistent with the substance and principles of USPAP also satisfy this requirement.

Qualified Appraiser:

According to the Act for a person to be a "qualified appraiser" must meet 5 requirements as laid down in the code. According to these requirements, an appraiser must:

1. Have earned an appraisal designation from a recognized professional appraiser organization
2. Demonstrate "verifiable education and experience" in valuing the type of property subject to the appraisal
3. Regularly performs appraisals for compensation
4. Not appear on the IRS's disqualification list at anytime during the three years prior to the date of appraisal
5. Meet other requirements [to be] prescribed by Secretary

However there is an exception available to taxpayers when the appraiser fails to meet the Act's rigorous requirements. The denial of the deduction is inapplicable "if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect."

Further, Notice 2006-96 states that the designation must be "awarded on the basis of demonstrated competency in valuing the type of property for which the appraisal is performed." Additionally, the Notice notes that alternative education and experience requirements are met if the appraiser has done each of the following:

1. Successfully completed college or professional level course work that is relevant to the property being valued.
2. Gained at least two years experience in the trade or business of buying, selling or valuing the type of property being valued.
3. Fully described his or her relevant education and experience in the appraisal.

Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.
About the Author
Mel Abraham CPA, CVA, ABV, ASA, CSP - author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the Pension Protection Act visit http://www.valuationeducation.com/penalties.html. He can be reached at mel@melabraham.com.
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