If an appraiser undervalues an asset for estate tax purposes, the penalties under Sec. 6695A of the Tax Code can be substantial. When the code section was enacted in 2006, it originally targeted the valuation of charitable donations of real estate, but it now applies to other assets and other contexts, including business appraisals for estate and gift tax purposes.
New case: In 2005, a Sotheby’s expert valued a painting at $500,000 for the deceased owner’s estate. In 2009, the painting sold at a Sotheby’s auction for a $2.1 million hammer price ($2.4 million with the buyer's premium). The IRS cried foul and demanded back taxes from the estate. The Tax Court sided with the IRS in its valuation of the painting and in its ruling cited a significant conflict of interest: The appraiser did the valuation at the same time he was soliciting the owner to sell other paintings. The owner was the estate’s residual beneficiary, so the “lowball” estimate would reduce the federal estate tax on the estate. If the valuation had occurred after 2006, the appraiser would likely have been penalized under section 6695A for a gross understatement of value.
Some appraisers have not been so lucky. Take the case of Alfred King (King Valuation Services LLP), who was on the hook personally for an undervaluation penalty of $28,000. He battled the IRS for two years and was vindicated (you can read his story in the December 2015 issue of Business Valuation Update). What happened to him can happen to any valuation expert today, so he advises that you become fully aware of the appraiser penalties under Section 6695A.
Learn more: If you’re in the New York City area, you can hear attorney Jonathan Blattmachr (Pioneer Wealth Partners) discuss penalties taxpayers face for valuation errors and when and how the appraiser may be financially responsible for those as well. He will also provide specific guidance on what appraisers can do to avoid penalties and increase the likelihood of their appraisals being accepted for tax purposes. His presentation will be on Tuesday, June 6, from 6:00 p.m. to 8:00 p.m. at Connolly's Pub, 14 E. 47th St., New York, NY. Click here to reserve your spot!