New requirements for charitable deductions put appraisers at risk.
Are appraisers more exposed undertaking charitable
contribution appraisals when the taxpayer-donor seeks a federal tax deduction?
This concern arises with the passage of the Pension
Protection Act of 2006, signed by President George Bush last August. The PPA
increases the requirements imposed for appraisals and appraisers to meet
Internal Revenue Code Section 170, which covers charitable contribution
requirements. Appraisers should recognize that if the qualified appraiser
requirements are not met or if the appraisal undertaken does not comply with
the new regulations, they could have additional legal exposure. This risk goes
beyond what normally might be the case for appraisers under the Uniform
Standards of Professional Appraisal Practice and other standards.
Appraisers must be aware of PPA changes, given that the
appraisal and appraiser need to conform to PPA requirements in order for the
taxpayer-donor to gain a deduction for federal income tax purposes.
The New Requirements
Under the PPA, charitable contributions greater than
$5,000 now require an appraisal by a qualified appraiser attached to the
taxpayer-donor's tax return. If the taxpayer-donor does not support the
charitable contribution deduction with an appraisal - and additional support
material if an audit occurs - the taxpayer may lose the charitable deduction.
If the taxpayer fails to gain the charitable deduction,
the appraiser may be at risk for a civil action, if the reason for the
deduction denial is traced to negligence by the appraiser in failing to comply
with PPA-imposed regulations.
Further, the PPA creates additional sanctions against
charitable contributors when an overstatement of valuation occurs supported by
an incorrect appraisal. Code Section 6695A, "Substantial and Gross
Valuation Misstatements Attributable to Incorrect Appraisals," states that
a penalty applies if a person prepares a defective property appraisal knowing
that the appraisal would be used in connection with a tax matter. If such claim
or tax return is based on an appraisal that results in a misstatement of the
gross valuation, then a substantial penalty can be involved. The penalty is the
greater of two amounts: if greater than $1,000, it is 10 percent of the amount
of tax underpayment or 125 percent of gross income received by the
taxpayer-donor from the appraisal. No penalty is imposed if the appraiser
establishes to the U.S. Treasury secretary's satisfaction that the appraised
value is the proper value.
Further help in determining the nature and meaning of the
new provisions is found by reviewing the comments in the PPA's "Technical
Explanation," prepared by the Joint Committee on Taxation at
Who Is Qualified?
The PPA added new definitions for a "qualified
appraisal" and a "qualified appraiser." An appraisal meets
"qualified" standards if the appraiser acts in accordance with
generally accepted appraisal standards and any regulations or guidance as
determined under the provisions.
A qualified appraiser under the new provisions means an
individual who has earned an appraisal designation from a recognized
professional appraisal organization and regularly performs appraisals for
compensation. The new law states that an individual will not be treated as a
qualified appraiser unless he or she demonstrates verifiable education and
experience in valuing the property type that is the subject of the appraisal.
An individual would not meet qualified appraiser
standards if he or she has been prohibited from practicing before the Internal
Revenue Service. This new provision gives more teeth to the new regulations,
making it more difficult for appraisers to qualify. An appraiser also may have
civil exposure from a taxpayer-donor who might claim that the appraiser was not
a qualified appraiser.
All appraisers should review the PPA provisions to comply
with the requirements for appraisals made for charitable
contributions. A summary of the changes prepared by the Appraisal Institute is
available at www.appraisalinstitute.org/govtaffairs/downloads/HR4AppraisalSummary.pdf.