Through A Microscope - Look Who’s Watching Now! (Part 2 Of 3)
Keywords: Appraisal, appraiser, value, valuation, taxes, IRS, internal revenue service, mel abraham, abraham,
This article examines the impact on taxpayers and appraisers as well as their advisors of the new Federal provisions of the Pension Protection Act. For appraisers performing valuations for federal tax purposes in accordance with the Pension Protection Act (PPA), signed into law in August 2006, stipulates new penalties and stiff sanctions if the appraisers or appraisals fail to meet the new qualifications.
New Appraiser Penalty
The new regulations have started to have a unsettling effect on the appraisers, primarily because it raises many questions, including what kind of tax (gift and estate tax, income tax, or both) is affected, and who may be hit by penalties.
Further, PPA added the new Section 6695A to the Internal Revenue Code. Section 6695A includes new penalties, which are pertinent to appraisers of property for income and transfer tax purposes.
New penalties are applicable to appraisals provided in connection with returns or claims for refunds filed after August 17, 2006. Penalties are applied when the appraised value of property deviates from the correct value by certain set percentages as follows:
“Substantial Misvaluation” (income tax environment): 150 percent or more off of actual value.
“Gross Misvaluation” (income or transfer tax environment): 200 percent or more off of actual value in an income tax case or 40 percent or less in a transfer tax case.
Appraiser penalty applies for appraisals prepared for returns or submissions filed after the date of enactment.
Amount of Penalty
Rather than the aiding and abetting penalty under section 6701 (generally limited to $1,000), appraisers are now subject to a penalty equal to over $1,000 or 10 percent of the underpayment attributable to the valuation misstatement, up to a maximum of 125 percent of the appraisal preparation fee (gross income) received by the appraiser.
Levying new penalties requires certain criteria to be fulfilled, including:
1. Appraiser must prepare an appraisal only in connection with a return or a claim for a refund.
2. Appraiser needs to know that the appraisal will be used for the above mentioned purpose.
3. Appraisal must result in a substantial valuation misstatement or gross valuation misstatement.
Misvaluation thresholds have been lowered, and also apply to estate and gift tax appraisals.
A substantial valuation misstatement arises if the value is 150 percent of the correct value. For example, if an income tax charitable deduction of $90,000 is claimed by a tax payee, based on an appraisal of a painting that the payee donates to a museum, and the correct value of the painting is later determined to be only $30,000, penalties would be enacted upon the appraiser section 6695A. In the case of estate or gift tax, a substantial misstatement occurs if the value exceeds the correct value by 65 percent or more. For example, if an appraiser applies a 45 percent discount for a going business with an underlying value of $100,000 for a value of $55,000. If the IRS and court determine that the discount should have only been 15 percent, the correct value would be $85,000. The appraised value is only 64.7 percent (i.e., less than 65 percent) of the “correct” value. As a result, a 20 percent substantial-understatement penalty would be levied on the appraiser’s fee.
A gross valuation misstatement occurs if the value exceeds the correct value by 200 percent or more. In the case of gift or estate tax, a gross valuation misstatement occurs if the value used is 40 percent or more of the correct value.
As penalties under section 6695A are far more severe than prior to PPA, appraisers may be more conservative and might be forced to choose to restructure or raise their fees; although as described above, the more gross income an appraiser derives from an appraisal, the larger the potential penalty. For example, an appraiser prepares an appraisal which he knows will be used to support an income tax deduction for a charitable contribution of the subject property. He charges $6,000 as the appraisal preparation fee. He values the property at $1 million, resulting in an income tax benefit from the deduction of $300,000. The correct value is $600,000, resulting in an income tax benefit from the deduction of $180,000. The appraiser is subject to penalty in this case as the claimed value of $1 million is more than 150 percent of the correct value of $600,000 (i.e., $900,000). According to PPA guidelines, appraiser’s penalty in this case is $7,500 (125 percent of the $6,000 fee), becau
se this is less than 10 percent of the tax underpayment (10 percent of 120,000, or $12,000).
The new penalties imposed under section 6695A create a non-uniform field for appraisers engaged by taxpayers and appraisers engaged by the IRS. Taxpayer appraisers are likely to be under the scanner of PPA and face penalties if their appraisals are later rejected. On the other hand, IRS appraisers face no similar penalties no matter how far their appraisals are from the values finally determined for tax purposes.
The penalty will not apply if the appraiser establishes to the satisfaction of the IRS that the value established in the appraisal was more likely than not the proper value. However, given the magnitude of the trigger point percentages, it would be unlikely to prove a “more likely than not” standard when the magnitude of difference is 40 percent or 200 percent.
Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.
Mel Abraham CPA, CVA, ABV, ASA, CSP - author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the PPA visit www.valuationeducation.com He can be reached at mel@melabraham.com.
Previous Articles Highlighter:
Dental Insurance Coverage - Level Of Services Will Vary, So Choose Wisely (1)
On top of this a basic dental plan will allow for typical tooth filling and any extractions that might be necessary, though extended services will only be covered to the extent that they show up in the policy.
Seminars: Which One's Worth It? (2)
Everyone has the ability to access positive thoughts and feelings, but many people don't know how to do so or just haven't thought about it. The same goes for the Law of Attraction, the Science of Getting Rich, the Silva Seminars and dozens of others.
How About Avoiding IRS Penalties? (3)
Similarly, you have to pay due taxes on whatever properties you might have. Hiding these amounts could mean penalties of about 20 to 40%. -Fraud and Deception - Fraud is an unpardonable excuse in the eyes of the IRS.
Buying A Time Share Foreclosure: Headache Or Bargain? (4)
Also keep in mind that there is a lot of fraud surrounding time share foreclosure sales. This is due to the high-pressure selling atmosphere that surrounds this type of property and the number of people who stand to lose a great deal of money when a foreclosure becomes imminent.
Is The Internet A Viable Source For Real Estate Leads (5)
As a real estate agent, solicitations from real estate lead generation companies seem to fill our email servers daily, but are they worth the cost and effort? If you follow a few rules, the answer is yes.
How Can Color Psychology Help To Sell Your Home Quickly? (6)
Some of the simple colors are blue, white and green. Psychology of Interior Colors: It is observed that using colors instead of flaunting plain white walls will enhance the chances of earning a profit.
Deferred Student Loans - There Are Rules, You Know! (7)
If you leave college, or do too few hours of class, for example, you may well be required to pay back all you have borrowed right away. From this point of view, so long as you stay enrolled in the college that you have chosen, or a similar qualifying one, you will be OK In this way, the loan is regarded as a deferred student loan.
Who Should Do Your Tax Return (8)
When you go online though you only get one return for every payment you make but you get the advantage of being able to access it anywhere with e-filing services included.
Preparing For A Home Sale In A Slow Market (9)
Give the buyer the freedom to feel free when he inspects the house. So spruce up the places which a buyer would like to see first, like the kitchen, bathrooms.
Financial Aid For College: Several Promising Signs (10)
To read more about how Amherst intends to implement (and pay for) its new program, see "Amherst Cuts Loans in College Aid." The third and final indicator is perhaps the most anecdotal but also the most promising of the three, at least potentially.
Preparing Your House For A Quick Sale (11)
Keywords: Sell Your House Fast, Sell Your Home Fast Preparation has always been the key for getting things done successfully and this applies to real estate as well because if you are planning to sell your house then you need to prepare it for sale to impress the potential buyers.
How To Compare Remortgage Deals Side By Side (12)
After all, they'll tell you, you can't expect to compare apples to oranges and come up with a comparison that makes sense. When it comes to remortgage deals, though, part of the comparison process is deciding which TYPE of remortgage is the best one for you.
Using The Right Strategy To Sell Your Home In A Slow Market (13)
You can opt a site that allows you to add photographs to the listings. The more photos you put online, the better the chances will be of the property getting noticed.
Do You Need An Agent To Sell Your Home Fast? (14)
You must think about all the essentials that are required for selling a house successfully and find out yourself if you are capable of handling the process. If you think you can go ahead and you have a positive response to most of the questions that are going to be talked about below, without a doubt you can sell your own house.
Who Uses Credit Cards And Why? (15)
You don't need to worry about having exact change, or being few pennies short of the full amount of your purchase. Keeping Track of Your Spends When you pay with your credit card, you'll have a handy record of all your purchases so that you can easily track your spends.
A New "Booming" Market Opportunity (16)
For those who wish to go beyond bequeathing money across the generations to sharing what's personally important to them, the "Send It Forward" market will fulfill that purpose. The Four Legacy Pillars: In a July 2005 Wall Street Journal Article, entitled, "When We're All 64" it's noted that "Boomers have a stronger need than their parents and grandparents to leave a legacy, and it's going to be a very big business" according to David Wolfe, a leading marketing consultant focusing on Baby Boomer consumer behavior.
How Can Home Staging Services Help You To Sell Your Home Fast? (17)
The idea is to redesign your house in such a manner that can arouse interest in people from different walks of life. It helps them find something or the other in the house that match their basic interests and help them to imagine their stay in the house.
Finding The Right Agent To Sell Your Home Fast (18)
Take time and do some good research before you decide on one real estate agent because you should get the value your house is worth of. So keep all these factors in mind when you search for a good real estate agent who can sell your home fast and at a good price.
Leasing Gives Providers A Way To Acquire Medical Equipment (19)
Do you normally pay shipping, installation, training and other soft costs on top of the actually hardware? You can search out leasing companies that will include these items in the lease.
Factoring Medical Receivables Provides Cash Flow (20)
Even the most efficiently run practices need short term working capital as their businesses grow, and as a result of this need, healthcare financing companies have sprung up to provide medical receivables funding.
Newer Articles Highlighter:
What Do Structured Settlement Payments And Lottery Winnings Have In Common? (1)
Keywords: Structured settlement, lottery winnings, payments, investments, common The terms mentioned above may sound quite different but don't let it fool you. Structured settlements and lottery winnings have many factors in common.
Blood-bath On Wall Street - Were You Caught ? (2)
The investment has to make sense today and tomorrow. Gamblers buy on a stock tip, then pray and hope for capital gains. They have little control over what happens to their stocks and have no Plan B if the market should head south.
Leverage Land Mines (3)
Let's look at the five year returns (as measured by NAV). Municipal Market returned 6.21% annually; Municipal Value 5.90%. 31 basis points annually for five years is a noticeable difference for municipal bond funds.
Bank Of England Notes Rise In Borrowing (4)
Despite this, the level of uptake for 'new' secured loans was reported to have decreased during June. Over the course of last month, 32.1 billion pounds was lent out, down from 32.7 billion pounds.
Easy Steps To Developing A Debt Consolidation Solution Budget (5)
These three items represent the amount of money you could conceivably avoid paying every month, if the total is even as low as 10% of your monthly items and for a good number of people it maybe higher, you are paying a substantial amount of your income to interest that could be avoided.
Holidays 'Getting Britons Into Debt' (6)
He added that those with difficulties handling their money should create a plan to reduce their monthly expenditure. "That should include switching debts to more competitive credit cards and consolidating debts into a personal loan.
Switching From One Account To Yet Another (7)
They may come up with incentives for bigger and smaller businesses. Why should you shift from one current account to another? It is the same reason as why you should think about trading in your old savings account for a newer one which offers you better savings facilities and a higher rate of interest.
Britons 'Looking To Further Interest Rate Increases' (8)
His comments come after a survey of leading financial analysts carried out by the Independent on Sunday suggested that the MPC will hike the base rate to six per cent, with a "significant number" of economists believing the committee could increase this to beyond 6.25 per cent.
Piggy Banking For Adults (9)
Others are studied just before the exams. Yet other lessons are learnt outside our classrooms. We learn to be less naive and a lot more careful. We learn to become more disciplined and determined.
Learn The Warning Signs And Avoid Predatory Lenders (10)
To know whether you're getting a reasonable price for the loan, do your research. What is standard cost of loans in the market? How much do other lending companies require?
Muddling Through Multiple Loans (11)
Previously, most people were content to live in rented apartments. Today, everybody is interested in buying some real estate. We are living in a confusing loan-funded world where we can invest in several things that we might otherwise have considered unaffordable.
Thinking About Living In New York City? (12)
New York is like a number of communities that blend resulting in many different ethnic backgrounds also blending. New York is very humid in the summers and the winters are usually cold with moderate snowfall and there are usually about 220 frost-free days in a year.
Get A Competitive Advantage By Leasing Equipment (13)
Keywords: equipment leasing, business equipment leasing, commercial equipment leasing, leasing For the majority of businesses, acquiring equipment of some type is necessary to generate sales and profits. The manner in which the equipment is paid for can be critical to the future of the business.
Know Your Options For Student Loans (14)
The basic difference between a subsidized student loan and one that is not, is that the subsidized loan will be awarded to students in financially challenged situations. A student that gets a non subsidized loan will be required to have some basic standards as far as credit and income goes.
6 Ways To Save Money When You Eat Out (15)
Unfortunately, eating out is an easy way to spend a lot of money and gain a ton of weight, which adversely affects your health. The FDA says Americans spend half their money on food in restaurants, but get only one-third of their calories from eating out.
What Makes A Gas Rewards Card Worthwhile? (16)
It's a great deal in that case. Stephanie Foster blogs at credit-blog.findcreditonline.com about credit and other money issues. Look over some of the best gas credit card offers at www.findcreditonline.com
Credit Counseling: The Basics (17)
They negotiate with your creditors so that the creditors relax the interest rates slightly so that it becomes easier for you to pay back. The creditors opt for this because they get their capital back with some interest and they don't have to go to the court and drag the matter on.
How To Fight Back After Bankruptcy (18)
Don't loan anything from anyone. If that means a much tougher life than what you are used to, then so be it. Pay all your bills on time.
Teenage Holiday Spending 'Could Impact On Parents' Finances' (19)
Lloyds TSB also revealed that 37 per cent of parents feel "nervous" about the security of their offspring's holiday spending. The study also showed that just under two-fifths (38 per cent) admit that their children are unable to create a budget.
How To Refinance Your Credit Card Dues (20)
And there are reasons behind such a credit boom. Businesses have realized that people tend to make more purchases on credit than they do when they pay by cash.
Permalink to Through A Microscope - Look Who’s Watching Now! (Part 2 Of 3)