The government shutdown, budget cutbacks—and now the pandemic—have impacted the IRS and how it selects and reviews tax returns that include valuations. During a recent webinar, a former IRS manager who dealt with valuations at the agency (and who was there during the last financial crisis) gave some advice on preparing valuations for estate and gift tax purposes in today’s environment
Déjà vu? Unlike the 2008 economic downturn, the IRS now has much less staff doing valuation work—about half of what it had back then, reports Michael Gregory (Michael Gregory Consulting LLC). Therefore, staffing is a concern that may impact the quality of the review process. The IRS can close out more cases faster with a less rigorous attention to quality, so there is a danger in that regard.
As the IRS did back in 2008, it will give more attention to certain elements of valuations. “They focused on the low-hanging fruit because that was the easiest to do,” he says. The first and foremost red flag is a discount for lack of marketability (DLOM), especially if DLOMs are being increased without adequate explanation. Second on the IRS radar screen has been S corporations because this is related to the issue of tax affecting, although it is not as prominent anymore due to tax law changes and recent court cases, Gregory notes. The third red flag is reasonable compensation. These three areas will continue to be targeted as the most likely areas of noncompliance the IRS will scrutinize while it has less resources to work with.
Gregory worked for the IRS for almost 30 years, much of the time dealing with valuation matters. He is now in private practice, and he stressed during the webinar that his views and opinions are his own and not those of the IRS. The webinar, which also included experts from Empire Valuation Consultants, is free and is available if you click here.
Extra: Gregory will co-present a four-hour workshop on normalizing compensation today, August 26, at 10 a.m. PT (1 p.m. ET). Stephen Kirkland (Atlantic Executive Consulting) and Paul Hamann (RCReports) will join him. To register, click here.
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