Appraised Values on Tax Returns: Burdens on Taxpayers Could Be Reduced and Selected Practices Improved
Published: 2012-06-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.
section_title: What GAO Recommends
paragraphs: 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.

section_title: Letter
paragraphs: 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 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.
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. TTCA extended the civil  penalties for misstated appraisals to estate and gift tax valuations.
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). 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 app. 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.
subsections: section_title: Background
paragraphs: 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.” 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. 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 app. II for more  detail). 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.  Estate taxes are reported on Form 706 and gift taxes on Form 709  (see app. 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. 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. 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. Appraiser penalty cases  are audited separately from the taxpayer examination cases in which IRS  may have first noticed improper appraisals.
section_title: 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
subsections: section_title: Appraisers Play a More Prominent Role in the Reporting of Estate Taxes Than Gift Taxes or Individuals’ Noncash Charitable Contributions
paragraphs: 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. 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 app. III).
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. 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.
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. 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. 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. 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 app. 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.  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.
section_title: As of March 2012, IRS Had Levied the PPA Penalty on Appraisers Six Times
paragraphs: 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.
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. 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.
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. 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.
section_title: IRS Does Not Target or Staff Examinations Based on Appraisals, but the Current Appraisal Threshold May Impose Unnecessary Burden on Taxpayers
subsections: section_title: IRS Does Not Choose Returns for Examination nor Does It Staff Those Examinations Based on Appraisals
paragraphs: 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.  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.
section_title: Examiners May Determine Whether Appraisals Are Accurate in the Process of Reviewing Returns, but the Current Threshold May Be Outdated
paragraphs: 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.
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. 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.
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.
section_title: Examiners Working on Appraisal Issues Have Access to In-house IRS Appraisal Experts and Outside Contractors for Assistance
paragraphs: 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, 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. 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. Our review of examination case  files found that examiners made referrals in accordance with the  guidance.
section_title: IRS Entered into 23 Outside Contracts for Noncash Contributions, Estate or Gift Tax Examinations Involving Appraisals from 2005 to 2011
paragraphs: 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.
section_title: IRS Follows Accepted Standards When Hiring Qualified Appraisal Staff, but Gaps Exist in Training and Performance Evaluation for the Art Appraisal Service
paragraphs: In our previous work on human capital management, we listed factors for  ensuring high-performance human capital management and ensuring  high program quality. 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.
subsections: section_title: Hiring
paragraphs: 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.
section_title: Training
paragraphs: 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.
section_title: Performance Quality Review and Management Oversight
paragraphs: 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). 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); 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. 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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Matter for Congressional Consideration
paragraphs: 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.
section_title: Agency Comments
paragraphs: 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 app. 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.
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section_title: Appendix I: Scope and Methodology
paragraphs: 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.
subsections: section_title: Estate Tax
paragraphs: 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. 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.
subsections: section_title: Identifying Assets, Deductions, and Exclusions Likely to Involve a Substantial Appraisal
section_title: 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
paragraphs: 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.
section_title: Determining Taxability and the Buffer before Taxability Begins
paragraphs: 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.
section_title: Extracting Exam Data from ERIS
paragraphs: 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.
section_title: Gift Tax
paragraphs: 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.
subsections: section_title: Identifying Gifts Likely to Involve a Substantial Appraisal
section_title: Noncash Charitable Contributions
paragraphs: 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.
subsections: section_title: Excluding Filers Who Did Not Claim Any Deductions for Donations Reported in Section B of Form 8283
paragraphs: 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.
section_title: Excluding Certain Additional Taxpayers Who Reported Amounts in Section B but Should Not Have Needed Qualified Appraisals
paragraphs: 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.
section_title: Classifying the Remaining Form 8283 Filers for Reporting Purposes According to the Likeliness of Their Needing a Qualified Appraisal
paragraphs: 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 business in any of the following listed industry:     Art dealers          Beverage and tobacco product manufacturing (wineries are  Independent artists  Jewelry stores  Jewelry, watch, etc., wholesalers  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.
section_title: Obtaining Data on Audit Rates and Audit Issues
paragraphs: 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.
section_title: Appendix II: Appraisal Reporting Requirements for Noncash Contributions and Gift and Estate Taxes
paragraphs: IRS has established rules and procedures for taxpayers to follow when  using appraisals to support noncash charitable contributions, estate, and  gift tax claims.
subsections: section_title: Noncash Charitable Contributions
paragraphs: 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, with a claimed  deduction of $5,000 or less, and securities of any value with readily  available market quotations. 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.
section_title: Estate Tax Returns
paragraphs: 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.
section_title: Gift Tax Returns
paragraphs: 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.
section_title: Penalty Thresholds and Valuation Misstatements
paragraphs: 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.
section_title: Appendix III: Tables on Appraisal Usage and IRS Appraisal Enforcement
paragraphs: Tables 2 through 12 contain data on appraisal usage and IRS’s appraisal  enforcement.
section_title: Appendix IV: Comments from the Internal Revenue Service
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.