IRS oversight of CPAs who provide valuation services.

• Author: Gregory, Michael
• Position: Certified public accountants

With the enactment of Sec. 6695A, the IRS was given new responsibilities to ensure the quality of appraisals and appraisers who provided information in support of a taxpayer's federal tax filings. Before Sec. 6695A was enacted by the Pension Protection Act of 2006 (PPA), (1) appraisers might have been penalized and brought before the Office of Professional Responsibility (OPR) under Sec. 6701(a), if they were found to have aided and abetted a taxpayer in understating the taxpayer's tax liability, or under Sec. 6700, if they were found to have promoted abusive tax shelters. However, actions under these sections were rare and penalties were small.

Sec. 6695A penalties can be substantial, which is why it has been a subject of much discussion and concern within the appraisal community since it was enacted. The original purpose of Sec. 6695A was to stop perceived abuse in real estate easement appraisals for charitable deductions. It was later explicitly extended to include business appraisals for estate and gift tax purposes. (2)

In implementing this statute, the IRS initially focused on a noncredentialed cottage industry of individuals providing opinions of value without the understanding, training, or experience to apply accepted appraisal methodologies. Sec. 6695A provided a minimum threshold that all appraisers and appraisals had to meet. This allowed the IRS to better fulfill its responsibilities and also helped protect the appraisal profession from competition by unqualified providers offering desired valuations at low prices.

Appraisers and Appraisals Defined

Sec. 170(f)(11)(E)(ii) provides that a "qualified appraiser" is an individual who:

* Has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the IRS;

* Regularly performs appraisals for which the individual receives compensation; and

* Meets such other requirements as may be prescribed by the IRS in regulations or other guidance.

Sec. 170(f)(11)(E)(iii) further provides that with respect to a specific appraisal, an individual will not be treated as a qualified appraiser unless that individual:

* Demonstrates verifiable education and experience in valuing the type of property subject to the appraisal; and

* Has not been prohibited from practicing before the IRS by the IRS at any time during the three-year period ending on the date of the appraisal.

Sec. 170(f)(11)(E)(i) defines a qualified appraisal as an appraisal that is (1) treated as a qualified appraisal under regulations or other guidance the IRS prescribed, and (2) conducted by a qualified appraiser "in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed" by the IRS (emphasis added). The IRS provided guidance on the meaning of these terms in Notice 2006-96 and proposed regulations. (3)

Generally Accepted Appraisal Standards

The AICPA finalized and issued Statement on Standards for Valuation Services No. 1 (SSVS1), Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, soon after the enactment of Sec. 6695A. SSVSI applies to all AICPA members, whether or not they hold an Accredited in Business Valuation. (ABV) credential:

This Statement establishes standards for AICPA members (hereinafter referred to in this Statement as members) who are engaged to, or, as part of another engagement, estimate the value of a business, business ownership interest, security, or intangible asset (hereinafter collectively referred to in this Statement as subject interest). For purposes of this Statement, the definition of a business includes not-for-profit entities or activities. (4) SSVSI itself acknowledged it would allow CPAs to be considereti qualified appraisers under Sec. 6695A. (5)

The AICPA and three other major business appraiser organizations are recognized by the IRS as having generally accepted business appraisal standards. The other organizations are the American Society of Appraisers, the National Association of Certified Valuators and Analysts, and the Institute of Business Appraisers...