Gross Valuation Misstatement Penalties Can Apply to Estate and Gift Appraisals

HNWElder Law, Estate Administration and Probate

In a recent legal memorandum, the IRS stated that it can assess, under IRC Sec. 6695A, a gross valuation misstatement penalty against an appraiser for preparing erroneous estate- and gift-tax appraisals after May 25, 2007.  The Pension Protection Act of 2006 (P.L. 109-280) added IRC Sec. 6695A to the tax law.  Generally, it states that if (1) a person prepares an appraisal and knows, or reasonably should have known, that it will be used in connection with a return or a claim for a refund, and (2) the claimed value of the property based on the appraisal results in a substantial or gross valuation misstatement within the meaning of IRC Sec. 6662(h), then a penalty should be assessed against the appraiser.  Under IRC Sec. 6695A, the penalty to be assessed is the grater of $1,000 or 10% of the amount of the underpayment attributable to the misstatement – but in no event can it be more than 125% of the gross income received by the appraiser for the appraisal.  The IRS noted that it wasn’t until the Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) amended the law that the income tax preparer penalties under the Pension Protection Act applied to the preparation of estate- and gift-tax returns as well.  In short, the reference in IRC Sec. 6695A regarding a “claim for refund” and a “return” were expanded to clarify their application to the imposition of any tax.  Also, though no statute of limitations exists under IRC Sec. 6695A and therefore, a penalty can be assessed at any time, as a practical matter, the memorandum indicates that the IRS should assess any penalty – to the extent practicable – within three years of the filing of the return or claim for refund at issue. (AM 2007-0017).

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