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. 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. 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. 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.