oversight

Appraised Values on Tax Returns: Burdens on Taxpayers Could Be Reduced and Selected Practices Improved

Published by the Government Accountability Office on 2012-06-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Requesters




June 2012
             APPRAISED VALUES
             ON TAX RETURNS

             Burdens on Taxpayers
             Could Be Reduced and
             Selected Practices
             Improved




GAO-12-608
                                              June 2012

                                              APPRAISED VALUES ON TAX RETURNS
                                              Burdens on Taxpayers Could Be Reduced and
                                              Selected Practices Improved
Highlights of GAO-12-608, a report to
congressional requesters




Why GAO Did This Study                        What GAO Found
Misstated appraisals used to support          Appraisers’ most prominent role relative to the three types of tax returns GAO
tax returns have long caused concern.         studied is in the valuation of estates. In the most recent years for which GAO had
In 2006, Congress adopted the                 data, appraisers were likely involved in the valuation of property worth from
Pension Protection Act, which changed         $75 billion to $167 billion reported on estate tax returns in 2009. In contrast, less
the criterion for when appraisals are         than $17 billion worth of gifts in 2009 and less than $10 billion in noncash
considered to be substantially                contributions in 2008 likely involved an appraiser. Gift tax returns that likely used
misstated and created a penalty for           appraisers had higher audit rates than gift returns that were unlikely to have
improper appraiser practices and              appraisers. The use of appraisers was not associated with higher audit rates for
qualifications for appraisers with
                                              estate tax returns and individual returns with noncash contributions.
respect to noncash charitable
deductions. The Tax Technical                 The Extent to Which Appraisers Are Involved in Different Types of Returns
Corrections Act of 2007 extended the                                                   Returns likely to involve
penalty for misstated appraisals to                                                           an appraiser as a            Estimated value
estate and gift taxes.                                                                            percentage of        of property likely to
                                               Type of return                       all returns in that category      involve an appraiser
Among its objectives, GAO was asked
                                               Estate tax returns (filed in 2009)      90 percent to 95 percent    $75 billion to $167 billion
to (1) describe the extent to which
                                               Gift tax returns (filed in 2009)        14 percent to 19 percent     $13 billion to $17 billion
individual, estate, and gift tax returns
                                               Returns with noncash                        Less than 1 percent        Less than $10 billion
are likely to involve an appraiser and         contributions (tax year 2008)
the extent to which IRS audits them;
                                              Source: GAO analysis of IRS data.
(2) describe how IRS selects returns
likely to involve appraisals for
                                              The Internal Revenue Service’s (IRS) procedures for selecting returns to audit do
compliance examinations, and assess
whether the current appraisal threshold
                                              not specifically target noncash contributions or gift or estate tax returns
is useful; and (3) assess IRS                 supported by appraisals. Nevertheless, returns with appraisals do get included in
procedures for ensuring that its              the population of audited returns because certain types of returns on which IRS
appraisal experts are qualified.              does focus, such as higher-income ones, are also the most likely ones to have
                                              noncash charitable contributions that require appraisals. The current appraisal
To accomplish these objectives, GAO           threshold for certain contributions over $5,000 has existed since 1984. The
analyzed IRS data, reviewed IRS               absence of an inflation adjustment over the past 25 years means that many
guidance, and interviewed appropriate         contributors who pay for appraisals would not have needed to do so when the
IRS officials.                                current threshold was first introduced. IRS seldom takes issue with appraisals for
What GAO Recommends                           noncash contributions. Consequently, there seems to be little risk in Congress
                                              raising the $5,000 dollar threshold.
GAO recommends that IRS develop a
comprehensive quality review program          IRS appraisal experts in one division met standards for ensuring that they were
for Art Appraisal Services (AAS) and          qualified. However, art appraisal experts in another division are not subject to
establish appraisal training                  either a comprehensive quality review program or continuing education
requirements specifically for AAS staff.      requirements specific to appraising art. The lack of comprehensive quality
Congress also should consider raising         reviews and mission-specific continuing education requirements could make the
the dollar threshold at which qualified       art appraisers less effective than they otherwise would be.
appraisals are required for noncash
contributions to reflect inflation. IRS
agreed with our recommendations.




View GAO-12-608. For more information,
contact James R. White at (202) 512-9110 or
whitej@gao.gov.

                                                                                           United States Government Accountability Office
Contents


Letter                                                                                      1
               Background                                                                   4
               Appraiser Use Is Most Prominent in Estate Taxes, Is Associated
                 with a Higher Probability of Being Audited for Gift Tax Returns,
                 and Has Led to Six PPA Penalties                                           6
               IRS Does Not Target or Staff Examinations Based on Appraisals,
                 but the Current Appraisal Threshold May Impose Unnecessary
                 Burden on Taxpayers                                                      11
               IRS Follows Accepted Standards When Hiring Qualified Appraisal
                 Staff, but Gaps Exist in Training and Performance Evaluation for
                 the Art Appraisal Service                                                16
               Conclusions                                                                19
               Recommendations for Executive Action                                       20
               Matter for Congressional Consideration                                     20
               Agency Comments                                                            20

Appendix I     Scope and Methodology                                                      22
               Estate Tax                                                                 22
               Gift Tax                                                                   24
               Noncash Charitable Contributions                                           26

Appendix II    Appraisal Reporting Requirements for Noncash Contributions and
               Gift and Estate Taxes                                                      30
               Noncash Charitable Contributions                                           30
               Estate Tax Returns                                                         32
               Gift Tax Returns                                                           32
               Penalty Thresholds and Valuation Misstatements                             33

Appendix III   Tables on Appraisal Usage and IRS Appraisal Enforcement                    34



Appendix IV    Comments from the Internal Revenue Service                                 45



Appendix V     GAO Contact and Staff Acknowledgments                                      47




               Page i                               GAO-12-608 Appraised Values on Tax Returns
Tables
          Table 1: Estimated Numbers and Percentages of Tax Returns and
                   Value of Property Likely to Involve an Appraiser                    7
          Table 2: Number of Estate Tax Returns Filed in 2007 through 2009,
                   by Likeliness of Having a Valuation Done by an Appraiser          34
          Table 3: Absolute Value of Assets, Deductions, and Exclusions
                   Reported on Estate Tax returns, by Likeliness of Having a
                   Valuation Done by an Appraiser                                    35
          Table 4: Number of Gift Tax Returns Filed in 2007 through 2009, by
                   Likeliness of Having a Valuation Done by an Appraiser             36
          Table 5: Absolute Value of Assets, Deductions, and Exclusions
                   Reported on Gift Tax Returns, by Likeliness of Having a
                   Valuation Done by an Appraiser                                    37
          Table 6: Number of Taxpayers Reporting Amounts in Section B of
                   Form 8283 in 2005 through 2008, by Likeliness of Needing
                   a Qualified Appraisal                                             38
          Table 7: Value of Deductions Reported in Section B of Form 8283
                   in 2005 through 2008, by Likeliness of Taxpayer Needing at
                   Least One Qualified Appraisal                                     39
          Table 8: Audit Rates for Estate Tax Returns Filed in 2007 through
                   2009, by Likeliness of Having a Valuation Done by an
                   Appraiser                                                         40
          Table 9: Audit Rates for Gift Tax Returns Filed in 2007 through
                   2009, by Likeliness of Having a Valuation Done by an
                   Appraiser                                                         41
          Table 10: Audit Rates for Taxpayers Reporting Amounts in Section
                   B of Form 8283 in 2005 through 2008, by Likeliness of
                   Needing a Qualified Appraisal                                     42
          Table 11: Rates of Audit That Included Noncash Contributions as
                   an Issue for Taxpayers Reporting Amounts in Section B of
                   Form 8283 in 2005 through 2008, by Likeliness of Needing
                   a Qualified Appraisal                                             43
          Table 12: No-Change Rates for Audit That Included Noncash
                   Contributions as an Issue for Taxpayers Reporting
                   Amounts in Section B of Form 8283 in 2005 through 2008,
                   by Likeliness of Needing a Qualified Appraisal                    44


Figures
          Figure 1: Events in IRS Development of Appraiser Penalty
                   Guidance, Calendar Years 2006 to 2010                             10



          Page ii                              GAO-12-608 Appraised Values on Tax Returns
Figure 2: Form 8283, Section B, Part I, Reporting Instructions for
         Noncash Charitable Contributions over $5,000                                     31




Abbreviations

AAS               Art Appraisal Services
AQMS              Appeals Quality Measurement System
CIC               coordinated industry case
EOAD              Examination Operational Automation Database
ERIS              Enforcement Revenue Information System
IC                industry case
IRM               Internal Revenue Manual
IRS               Internal Revenue Service
LB&I              Large Business and International Division
OPR               Office of Professional Responsibility
PPA               Pension Protection Act of 2006
SB/SE             Small Business and Self-Employed Division
SOI               Statistics of Income
TTCA              Tax Technical Corrections Act of 2007
USPAP             Uniform Standards of Professional Appraisal Practice


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Page iii                                      GAO-12-608 Appraised Values on Tax Returns
United States Government Accountability Office
Washington, DC 20548




                                   June 5, 2012

                                   The Honorable Max Baucus
                                   Chairman
                                   The Honorable Orrin Hatch
                                   Ranking Member
                                   Committee on Finance
                                   United States Senate

                                   The Honorable Charles Grassley
                                   Ranking Member
                                   Committee on the Judiciary
                                   United States Senate

                                   The tax liabilities of individuals who make noncash charitable donations
                                   or who receive inheritances or gifts of property can depend significantly
                                   on the valuation of the property. Valuable property such as art, cars,
                                   businesses, real estate, and easements, by law must be independently
                                   appraised to determine exactly how much the taxpayer should report on a
                                   tax return. An appraisal is an opinion about the value of a particular asset
                                   at a particular time and is prepared following professionally accepted
                                   procedures. If appraisals overvalue the property in the case of charitable
                                   donations, or undervalue the property in the case of bequests or gifts,
                                   taxpayers may—intentionally or mistakenly—pay less tax than they
                                   should. Although the Internal Revenue Service (IRS) has not determined
                                   the extent to which appraisals contribute to misreporting, data from an
                                   IRS study on taxpayer noncompliance showed a 45 percent error rate on
                                   noncash charitable deductions, totaling $4.6 billion in lost revenue. For
                                   about every five errors favorable to the taxpayer, one was unfavorable to
                                   the taxpayer. In 2005 IRS and the Joint Committee on Taxation identified
                                   overvalued donations of conservation easements1 as a particularly
                                   problematic issue. The problem persists. In 2011 the Department of
                                   Justice sought and the District Court for the District of Columbia issued an
                                   injunction against a company that IRS identified as improperly
                                   encouraging taxpayers to seek appraisers who would misvalue




                                   1
                                    A conservation easement represents a contractual agreement between the property
                                   owner and a charitable organization receiving the easement to preserve the property.




                                   Page 1                                       GAO-12-608 Appraised Values on Tax Returns
conservation easement contributions on building façades for noncash
charitable deductions.2

Congress addressed appraisal-related noncompliance in the Pension
Protection Act of 2006 (PPA) and the Tax Technical Corrections Act of
2007 (TTCA). The PPA lowered the thresholds on when IRS should
consider appraisals misstated, established a civil penalty for preparing a
misstated appraisal, and set a statutory definition on qualifications for
appraisers with respect to charitable deductions.3 TTCA extended the civil
penalties for misstated appraisals to estate and gift tax valuations.4

Because of your interest in how these laws may have affected tax
compliance, you asked us to review IRS’s enforcement efforts with
respect to appraisals. In this report we (1) describe the extent to which
individual, estate, and gift tax returns are likely to involve appraisers’
valuations, the extent to which IRS audits such returns, and the extent to
which appraiser-specific penalties have been levied; (2) describe how IRS
selects and staffs returns likely to involve appraisers that it chooses for
examination, how examiners determine whether an appraisal is accurate,
and the extent to which IRS uses contractors to provide appraisal
expertise, as well as assess the usefulness of the current appraisal
reporting threshold; and (3) assess IRS’s procedures for ensuring that its
appraisal experts are qualified.

To identify the extent to which appraisers’ valuations may cause an issue
for estate and gift tax returns and for returns of individuals making
noncash charitable contributions, we analyzed IRS Statistics of Income
(SOI) samples of these three populations of returns for filing years 2007
through 2009 (for estate and gift tax) and tax years 2005 through 2008
(for individual returns with noncash contributions).5 To identify the rate at



2
  United States v. McClain, Civil No. 11-1087 (D.D.C. July 13, 2011) (stipulated order of
permanent injunction).
3
  Pub. L. No. 109-280, 120 Stat. 780 (2006). According to the law, qualified appraisers
must have an appraisal designation from a recognized appraisal organization or meet
education requirements set by the Secretary of the Treasury, regularly perform appraisals,
and meet other standards set by the Secretary of the Treasury. IRC §170(f)(11)(E)(ii).
4
    Pub. L. No. 110-172, 121 Stat. 2473 (2007).
5
 See app. I for a detailed description of this analysis. We used different time periods
because of differences in the availability of data from SOI.




Page 2                                            GAO-12-608 Appraised Values on Tax Returns
which IRS audits returns with potential issues caused by appraisers and
the amounts of tax adjustments for appraiser-related cases, we had IRS
match the cases we analyzed from the SOI sample of taxpayers claiming
noncash contributions against examination results data available from the
Examination Operational Automation Database (EOAD), which contains
information on audit adjustments relating to specific audit issues. Given
the limitations of the issue coding in the database, we can reliably report
on adjustments relating to noncash contributions but not specifically
relating to the appraisal of those contributions. EOAD does not contain
data for estate and gift tax audits, so we had IRS match the SOI cases for
those taxes to data from the Enforcement Revenue Information System.
This process allowed us to reliably determine which returns were audited.
We calculated confidence intervals for all of our estimates. To report the
number of appraiser penalties, we consulted with the IRS penalties
officials who track the penalty created under the PPA.

To describe how IRS selects and staffs appraisal-related examinations,
we reviewed IRS staffing and case selection procedures and interviewed
IRS officials responsible for examination planning. To gather information
on how IRS audits tax returns with appraisals, we identified through our
data analysis a random sample of tax year 2008 returns that were likely to
involve appraisals and that had been audited by IRS. We then reviewed
the examination files for these cases to identify any inconsistencies
between stated examination policies in the Internal Revenue Manual
(IRM) and the recorded activities of examiners. To determine the extent of
contractor use for appraisal-related examinations, we reviewed
contracting procedures in the IRM and other documentation from IRS. We
then compiled data from IRS records detailing the use of contractors.
GAO previously has found IRS’s system for recording contracts to be
unreliable for financial accounting, but the data was still reliable for
purposes of this report. To assess how IRS ensures that its appraisal
experts are qualified, we identified the types of experts IRS uses and
compared IRS hiring, training, and performance quality review procedures
with standards that GAO has proffered in the past regarding human
capital management. We also interviewed officials responsible for staff
performance quality.

We determined for the purposes of this review that the data used were
reliable (see app. I for details on our scope and methodology). We
conducted this performance audit from October 2010 through June 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our


Page 3                                GAO-12-608 Appraised Values on Tax Returns
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             The PPA set stricter standards for appraisals and appraiser qualifications,
Background   established a penalty on appraisers who prepared appraisals that
             improperly supported deductions on income taxes, and lowered the
             threshold for determining certain misstatements of value on certain tax
             returns.

             In terms of noncash charitable contributions, the PPA defined a “qualified
             appraisal” as one that was conducted in accordance with generally
             accepted standards by a “qualified appraiser.”6 A “qualified appraiser” is
             defined as an individual who has earned an appraisal designation from a
             recognized professional appraiser organization or has met the minimum
             education and experience requirements set forth in the IRS regulations,
             and who regularly performs appraisals for compensation.7 For individuals,
             noncash charitable contributions are reported on Form 1040, U.S.
             Individual Tax Return, Schedule A, Itemized Deductions, and
             contributions of $500 or more must be itemized on Form 8283, Noncash
             Charitable Contributions. With certain exceptions, taxpayers claiming
             noncash contribution deductions of items or groups of similar items
             exceeding $5,000 must obtain qualified appraisals for the donated
             property, and report those on Form 8283, Section B (see app. II for more
             detail).8 The provisions concerning qualified appraisals do not apply to
             estate or gift taxes. For those taxes IRS simply requires taxpayers to


             6
               I.R.C. §170(f)(11)(E)(i) and §170(f)(11)(E)(ii). There is no single, universally accepted
             set of appraisal standards that apply to every situation in which an appraisal might be
             used, but some professional appraiser associations have adopted standards with similar
             principles, such as a code of ethics, valuation approaches and methods, and guidelines
             for developing appraisal reports. One set of standards is the Uniform Standards of
             Professional Appraisal Practice (USPAP), which an IRS notice on appraisal requirements
             cites as an example. Among other things, the USPAP set ethics and competency rules,
             and established standards for the development of appraisals of real property, personal
             property, and business assets.
             7
               The PPA did not specify what constituted a recognized professional organization, but
             professional associations, such as the American Society of Appraisers and the National
             Association of Certified Valuation Analysts, provide professional training, certification, and
             accreditation programs.
             8
                 The $5,000 threshold was established by Congress in 1984.




             Page 4                                          GAO-12-608 Appraised Values on Tax Returns
support property values with an appraisal, which could be a written
appraisal by a professional appraiser, but does not have to be in every
case.9 Estate taxes are reported on Form 706 and gift taxes on Form 709
(see app. II for more detail on how appraisals may appear on these
forms). In general, the higher the appraised value of a noncash charitable
contribution, the higher the deduction a taxpayer might claim. Conversely,
the lower the appraisal for property reported on gifts and estate taxes
returns, the less tax must be paid.

IRS has long had the authority to impose a penalty on a taxpayer for
valuation misstatements included on a return, but prior to the PPA, IRS
did not have specific authority to impose a penalty on the appraiser who
prepared the valuation. The penalty rate has two levels related to the
proportion of the misstatement. The PPA changed the thresholds for the
two levels and increased the penalty rate for larger misstatements.10 The
act also added an appraiser penalty, which applies to any person who
prepared a misstated appraisal and knew or reasonably should have
known would be used to support an individual income tax return.11 In
2007, TTCA made the appraiser penalty applicable for appraisals
improperly supporting estate and gift tax returns.

The responsibility for identifying cases with appraisals and staffing
examinations on appraisals largely rests with IRS’s Small Business and
Self-Employed (SB/SE) Division, which handles complex individual
returns and gift and estate returns, and its Large Business and
International (LB&I) Division, which handles partnership returns with
assets greater than $10 million. Examination of appraisals typically will be
conducted with field examination techniques.12 Appraiser penalty cases
are audited separately from the taxpayer examination cases in which IRS
may have first noticed improper appraisals.



9
 In this report we use “appraisal” to mean a valuation made for estate or gift tax purposes
by a professional appraiser or a qualified appraisal for purposes of noncash charitable
contributions.
10
     For more information on how the thresholds changed under the PPA, see app. II.
11
   The penalty on an appraiser would be the lesser of (1) the greater of $1,000 or 10
percent of the underpayment derived from the misstated appraisal or (2) 125 percent of
the gross income received by the appraiser for preparing the appraisal.
12
   A field examination typically involves IRS visiting the taxpayers’ place of work or
residence.




Page 5                                         GAO-12-608 Appraised Values on Tax Returns
Appraiser Use Is Most
Prominent in Estate
Taxes, Is Associated
with a Higher
Probability of Being
Audited for Gift Tax
Returns, and Has Led
to Six PPA Penalties
Appraisers Play a More      We estimated that more than 90 percent of estate tax returns filed in 2009
Prominent Role in the       included assets, deductions, or exclusions of more than $50,000 in
Reporting of Estate Taxes   categories that IRS officials told us were likely to require the use of an
                            appraiser.13 In contrast, less than 20 percent of gift tax returns and less
Than Gift Taxes or
                            than 1 percent for individual returns with noncash charitable contributions
Individuals’ Noncash        were likely to need an appraiser. For estate tax returns, we estimated that
Charitable Contributions    the aggregate value of property needing appraisers was at least $75
                            billion in 2009. This was greater than for gift or individual tax returns (see
                            table 1 and tables 2 through 7 in app. III).




                            13
                               When discussing estate and gift taxes, an appraisal is a valuation conducted by a
                            professional and may cover a different set of property than an appraisal for noncash
                            contributions. A more detailed explanation of how we determined what types of property
                            likely involved an appraiser is provided in app. I.




                            Page 6                                      GAO-12-608 Appraised Values on Tax Returns
Table 1: Estimated Numbers and Percentages of Tax Returns and Value of Property Likely to Involve an Appraiser

                                           Estimated number Returns likely to involve an
                                          of tax returns likely appraiser as a percentage of                 Estimated value of property
Type of return                       to involve an appraisera     all returns in that category             likely to involve an appraiser
Estate tax returns
(filed in 2009)                                30,000 to 32,000                    90 to 95 percent               $75 billion to $167 billion
Gift tax returns
(filed in 2009)                                34,000 to 43,000                    14 to 19 percent                 $13 billion to $17 billion
Returns with noncash charitable
contributions
(tax year 2008)                              Fewer than 76,000                 Less than 1 percent                     Less than $10 billion
                                        Source: GAO analysis of IRS data.

                                        Note: Dollar figures have been adjusted for inflation to 2012 dollars using the U.S. GDP deflator.
                                        a
                                         For estate and gift tax returns we estimated the number of returns with appraisable items of more
                                        than $50,000 and $25,000, respectively.


The Likelihood of Audits Is             For returns filed in 2007 through 2009, we found that gift tax filers who
Associated with Appraisals              were likely to have needed an appraiser were at least twice as likely to
for Gift Tax Returns Being              have been audited than gift tax filers who were not likely to have needed
                                        an appraiser.14 Conversely, for estate tax returns we found no statistically
Audited but Not for Other
                                        significant evidence that the likely use of an appraiser was associated
Returns                                 with a higher probability of being audited. Audit rates for estate tax returns
                                        (which ranged from 8.1 percent for returns filed in 2007 to 10.1 percent
                                        for those filed in 2009) are typically significantly higher than those for gift
                                        tax and individual income tax returns.15

                                        For individual income tax returns for tax years 2005 through 2008, we
                                        could also not detect any statistically significant differences in audit rates
                                        based on the likeliness that a Form 8283 filer required a qualified
                                        appraisal.16 For most years, we found no statistically significant
                                        differences between the audit rates for taxpayers who claimed at least
                                        $5,000 worth of noncash deductions from Section B of Form 8283 and
                                        IRS’s reported audit rates for all individual taxpayers, when compared in
                                        broad income groups. (For 2007 returns, we found that the audit rate for
                                        high-income Section B filers was at least 1 percent higher than the rate


                                        14
                                             See app. III, table 9.
                                        15
                                             See app. III, table 8.
                                        16
                                             See app. III, table 10.




                                        Page 7                                              GAO-12-608 Appraised Values on Tax Returns
for high-income taxpayers in general). We estimated that the rate of
individual taxpayer audits that specifically included noncash contributions
as an issue was 0.5 percent or less for tax year 2008 but as high as 3.7
percent for tax year 2006.17 The total amount of upwards adjustments in
tax liabilities associated with appraisals issues (and agreed to by
taxpayers) was less than $37 million for each year from 2006 to 2008. For
2005 the amount was between $67 million and $91 million.

For most of the years we reviewed, the sizes of our subsamples of audits
that specifically identified noncash contributions as being an issue were
too small to yield useful information concerning that particular issue’s no-
change rate.18 However, in the case of returns filed for tax year 2007 we
were able to estimate that the no-change rate for noncash contribution
issues was between 72 percent and 97 percent with a 95 percent level of
confidence (see app. II, table 12).

IRS officials said the contributions that some individual taxpayers report
on their returns are made through partnerships or Subchapter S
corporations and that those contributions may be reviewed in audits of
those entities rather than in audits of the individuals’ returns.19 We
reviewed data for all 121 partnership and S corporation audits involving
noncash contributions that were referred to the Engineering Program
(Engineering), a group within LB&I that staffs appraisal experts available
to examiners for consultation, for assistance in calendar year 2010. We
found that in 31 of those cases, the value of the contribution was
identified as an audit issue. Separately, IRS officials told us that from
2007 through February 2012, 500 individual tax returns were adjusted as
a result of SB/SE audits of deductions relating to conservation easements
claimed by these types of entities.




17
     See app. III, table 11.
18
   The no-change rate was computed by first estimating (1) the number of cases where
noncash contributions were included as an issue to be reviewed and (2) the number of
those cases where an adjustment was made to the contribution and then dividing (2) by
(1).
19
   Partnerships and S corporations are “pass-through” entities, meaning that they are not
subject to the corporate income tax. Instead, these entities’ income, deductions, and
credits are allocated to the partners or shareholders.




Page 8                                       GAO-12-608 Appraised Values on Tax Returns
As of March 2012, IRS Had   The total amount of PPA penalties assessed in the six existing cases
Levied the PPA Penalty on   where appraiser penalties have been assessed was $159,713, with the
Appraisers Six Times        penalty amounts ranging from several hundred dollars to tens of
                            thousands of dollars. An IRS official said that the agency has not abated
                            any of the penalties.20

                            IRS provided several reasons for the first PPA penalties not being levied
                            until several years after enactment. First, given that the PPA penalties
                            apply to appraisals accompanying returns filed after August 17, 2006, IRS
                            officials said that they estimated that returns containing appraisals that
                            could be subject to the penalty would not enter the audit stream for a few
                            years. Therefore, IRS targeted 2009 to issue guidance and make
                            computer system changes. IRS posted a notice about the legislation in
                            2006 and on August 18, 2009, issued an interim guidance memorandum
                            as initial instructions for examiners on the application of the appraiser
                            penalty. This guidance, which was developed by SB/SE and accepted by
                            the other divisions of IRS, included procedures to make the penalty
                            accessible by examiners and deliver the appropriate appraiser penalty
                            assessment notices to appraisers.21 Second, IRS officials said that they
                            had to create the computer infrastructure for examiners to apply and
                            record penalties, draft and approve the form letters to be sent out to those
                            assessed the penalty, and prepare the guidance for IRS examiners in the
                            time between the PPA’s passage and the issuance of final guidance on
                            the appraiser penalty. A third factor IRS cited was that its examiners
                            typically conclude a case against a taxpayer before pursuing a case
                            against the appraiser. Figure 1 shows the sequence of events from
                            passage of the PPA to the establishment of formal guidance for
                            examiners in the IRM.




                            20
                                 An “abatement” is an IRS decision to cancel or annul a tax assessment or penalty.
                            21
                              IRS guidance also instructs examiners who levy the PPA penalty to alert IRS’s Office of
                            Professional Responsibility (OPR) about willful violations of the incorrect appraisals
                            provision of PPA. OPR has the authority to impose disciplinary sanctions, such as
                            practitioner disbarment and disqualification, against professionals who practice before
                            IRS, including appraisers, as described in Circular 230, the IRS publication that
                            documents the regulations that professionals must follow to represent taxpayers before
                            IRS.




                            Page 9                                         GAO-12-608 Appraised Values on Tax Returns
Figure 1: Events in IRS Development of Appraiser Penalty Guidance, Calendar Years 2006 to 2010




                                        Application of the appraiser penalty may increase as examiners become
                                        more familiar with the process of initiating these investigations, according
                                        to IRS examination officials. They said that traditionally, examiners have
                                        used other penalties to address appraiser noncompliance. Prior to the
                                        PPA, IRS could assess penalties on appraisers for promoting abusive tax
                                        shelters and aiding and abetting tax noncompliance under other sections
                                        of the Internal Revenue Code.22 IRS officials said that appraisal issues
                                        have never been significant in penalty cases compared to other promoter
                                        and preparer violations—officials estimated that maybe 10 or 15 out of
                                        every 1,000 penalty cases involved appraisals.




                                        22
                                             I.R.C. § 6700; I.R.C. § 6701.




                                        Page 10                                  GAO-12-608 Appraised Values on Tax Returns
IRS Does Not Target
or Staff Examinations
Based on Appraisals,
but the Current
Appraisal Threshold
May Impose
Unnecessary Burden
on Taxpayers
IRS Does Not Choose       IRS’s case examination planning and guidance for SB/SE and LB&I field
Returns for Examination   exams does not explicitly target appraisals, but current selection methods
nor Does It Staff Those   may lead to cases with appraisals indirectly. Examination planners in both
                          SB/SE and LB&I use database tools, such as the Audit Information
Examinations Based on     Management System and the Examination Returns Control System, to
Appraisals                manage cases for examination, but these databases do not contain
                          variables that would enable exam planning or high-level case selection
                          and staffing based specifically on appraisals. Consequently, when
                          choosing returns to audit, IRS does not know whether any particular
                          return has a related appraisal. For similar reasons, gift and estate returns
                          also are not targeted for specific appraisal issues.

                          Similarly, IRS does not staff examinations based on appraisals. The
                          examiners who lead these teams are generalists and do not necessarily
                          have specific expertise relating to appraisal techniques. The presence of
                          an appraisal as a potential audit issue does not affect how IRS assigns
                          these generalists to specific cases.

                          Individual noncash contributions, gift, and estate tax returns with
                          appraisals all may be selected for examination indirectly because of
                          characteristics that are correlated with appraisals. For example, SB/SE
                          field audit priorities focus on high wealth individuals, who are more likely
                          to make the kinds of large noncash contributions, give large gifts, or have
                          large estates that would include items requiring appraisals. In tax year
                          2008 individuals with adjusted gross incomes of $200,000 or more
                          accounted for over 75 percent of the noncash contributions of real estate,
                          easements, art, and collectibles reported on Forms 8283, even though
                          they represented less than 15 percent of individuals filing that form. Other
                          SB/SE priorities that may indirectly involve appraisals include abusive
                          transactions and special examination projects. Like SB/SE, LB&I does not


                          Page 11                               GAO-12-608 Appraised Values on Tax Returns
                             select cases based on the inclusion of appraisals. LB&I devotes
                             resources to priorities set in annual examination plans and then allocates
                             the remaining available staff to other work.

                             IRS has targeted noncash contributions for audits, which could include
                             reviews of appraisals, but the targeting is not based on appraisals. IRS
                             selects a portion of its examination inventory using a computerized
                             scoring system called the Discriminant Index Function. Within this
                             system, the presence of unusual, large, or questionable contributions is
                             one of numerous factors that can increase the probability that a return will
                             be selected for audit. IRS also has a matching program that compares
                             Form 8283 with Form 8282, which includes the amounts donee
                             organizations report to have received when they dispose of contributed
                             assets. Mismatches between these returns can lead to an examination.23
                             In addition, one of IRS’s past special examination projects specifically
                             targeted deductions relating to façade easements in SB/SE’s North
                             Atlantic office, which could have involved reviews of appraisals on the
                             easements’ values. The project, which ran from 2008 to 2010, covered
                             152 tax returns. As of April 2012, IRS said it has closed 60 cases with an
                             average recommended adjustment per return of $252,067.24


Examiners May Determine      Although IRS does not select returns for examination based on
Whether Appraisals Are       appraisals, IRS case-review guidance may lead examiners to detect
Accurate in the Process of   appraisal issues once a return has been selected for review for other
                             reasons. Different guidance applies to examiners reviewing individual,
Reviewing Returns, but the   estate, and gift returns.
Current Threshold May Be
Outdated


                             23
                                Donees disposing of contributed assets within three years of the date of receipt must
                             report contributions on Form 8282, with some exceptions, such as amounts received that
                             are less than $500. IRS transcribes Form 8282 annually and electronically matches the
                             amounts reported on the form with the total noncash contribution amounts that taxpayers
                             report on Forms 1040, Schedule A. If there is a potential tax discrepancy of a certain
                             amount the return is classified for potential examination. The classifier manually compares
                             each Form 8282 with the corresponding Form 8283 to further audit the discrepancy and
                             identify the returns with issues that merit a full examination.
                             24
                                The figures cited here refer only to the returns chosen as part of the special project; IRS
                             has audited other returns with façade and conservation easement issues. From 2007
                             through February 2012, SB/SE, alone, closed examinations on 3,384 returns reflecting
                             deductions relating to conservation easements, which could involve reviews of appraisals.




                             Page 12                                        GAO-12-608 Appraised Values on Tax Returns
Noncash Charitable            The guidance focuses examiner attention on a number of issues involving
Contributions on Individual   appraisals and related issues, including
Returns
                                  checking that taxpayers obtained qualified appraisals, if required;
                                  verifying that the appraised values of noncash contributions
                                   exceeding $5,000 are listed in Form 8283, Section B;
                                  ensuring that taxpayers attach qualified appraisals for certain assets,
                                   such as easements registered in historic districts;
                                  auditing elements of noncash contributions that seem questionable,
                                   such as missing, incomplete or altered forms and documents, and
                                   contributions that seem excessively large compared to reported
                                   taxpayer income;
                                  reviewing any large, unusual or questionable items relating to
                                   noncash charitable contributions; and
                                  reviewing the appraisal supporting donations over a certain amount
                                   for completeness and issues such as questionable authenticity and
                                   appraiser judgment.

                              IRS officials said that it was up to the judgment of the individual examiner
                              to decide whether the potential additional tax to be gained from
                              investigating appraisals in detail warrants the investment of audit
                              resources. The agency does not require documentation of such
                              judgments when the issue has not initially identified for examination. Our
                              review of 80 examination files from tax year 2008 with $5,000 or more in
                              noncash charitable contributions showed that Forms 8283 were
                              incorrectly filled out in 17 cases but the examiner made no change.25 In
                              10 of those cases, the examiner did not leave a record explaining why no
                              further action was taken; therefore, we could not determine whether the
                              examiners made a conscious decision not to follow up on the incorrect
                              Forms 8283. In the other seven cases where the Form 8283 was
                              incorrect and the examiner left a record, the taxpayers supplied additional
                              information during the audit that satisfied the examiners. This shows that
                              taxpayers can be compliant with the appraisal rules even when they do
                              not fill out Form 8283 correctly. We found no obvious incorrectly reported
                              Forms 8283 in the other 63 cases.

                              Our file review also suggests that, even in cases where examiners do
                              change noncash contribution deductions, few of those changes are due to


                              25
                                We define “incorrectly filled out” as the form not having the required signatures from
                              appraisers or donees.




                              Page 13                                       GAO-12-608 Appraised Values on Tax Returns
                          problems with appraisals. As discussed previously, for tax year 2007,
                          examiners made no changes to such deductions in the majority of cases
                          in which noncash contributions were identified as a potential problem to
                          review. Our file review showed that in only a small percentage of the
                          cases in which noncash contributions were changed was the change
                          made due to a problem with an appraisal. These facts suggest that IRS is
                          not finding widespread noncompliance with appraisals for noncash
                          contributions and the potential revenue yield from auditing appraisals of
                          lower-value items is likely to be small. At the same time, the number of
                          taxpayers who are required to pay for appraisals of items with relatively
                          low values (in real, inflation-adjusted terms) has likely increased because
                          the $5,000 threshold has not been changed since Congress set it in 1984.
                          The threshold would be worth more than $11,000 if adjusted to 2012
                          dollars.

Gift and Estate Returns   Once IRS selects estate and gift returns for examination, classifiers
                          review the returns to identify issues to be audited closely. IRS guidance
                          instructs classifiers to review returns in their entirety, including a review of
                          any appraisals. IRS estate tax return examiners and managers said that
                          estate tax returns can contain voluminous documentation and examiners
                          do not have enough time to go through each appraisal and audit every
                          possible valuation issue. In cases where valuations are an issue for either
                          estate and gift taxes, examiners review the appraisals attached to the
                          schedules selected for examination and make referrals to IRS appraisal
                          experts in LB&I’s Engineering Department, as needed. If appraisals are
                          not attached and should be, examiners contact taxpayers to request
                          these. The value of some assets, such as publicly traded stocks, can be
                          determined without complex methodologies, using public market
                          quotations. Examiners also check appraised values using various tools
                          depending on the type of asset. For example, examiners may use “blue
                          books” or other resale guides for personal property, and may use various
                          computer programs that have comparable-sales values for real estate.




                          Page 14                                 GAO-12-608 Appraised Values on Tax Returns
Examiners Working on      IRS employs appraisal experts in two areas, Engineering and Art
Appraisal Issues Have     Appraisal Services (AAS), which provide valuation assistance to
Access to In-house IRS    examination teams in determining an appraisal’s legitimacy. Engineering,
                          as previously mentioned, employs staff appraisers who assist with the
Appraisal Experts and     examination of complex appraisal issues,26 and AAS, part of the Appeals
Outside Contractors for   Office (Appeals), provides assistance specifically for appraisals of art.
Assistance
                          Under current IRS guidance, examiners should refer cases with
                          appraisals above certain thresholds to Engineering and AAS appraisers
                          for assistance.27 Estate and gift tax examiners must at a minimum consult
                          with Engineering for assistance in determining the accuracy of appraised
                          values for examinations where the focus includes appraisal issues. IRS
                          guidance also encourages examiners to request the assistance of
                          Engineering and AAS experts for cases not requiring mandatory referral,
                          if valuation assistance is appropriate.28 Our review of examination case
                          files found that examiners made referrals in accordance with the
                          guidance.




                          26
                            Engineering employs other types of professional experts; however, for purposes of this
                          report, references to the Engineering Department or engineers refer only to that group’s
                          appraisal experts.
                          27
                             IRS policy requires examiners to refer corporate returns with assets worth $10 million or
                          more, and partnership returns with 11 or more partners and gross deductions greater than
                          $1 million to Engineering. IRS policy also says that examiners should refer income tax
                          returns with a valuation issue of $500,000 or more, and estate and gift tax returns with
                          assets valued at $500,000 or more, or with a total tax of $1 million or more, to
                          Engineering. IRS policy requires examiners to refer all cases selected for examination with
                          art valued at $50,000 or more to AAS for review.
                          28
                             AAS also has access to a group of art experts, the Art Advisory Panel, which assists
                          IRS in evaluating taxpayer-submitted art appraisals by reviewing the fair market values for
                          art reported on estate, gift, and individual income tax returns. The panel is composed of
                          prominent art experts, including museum directors, curators, and scholars. The panel
                          makes recommendations on the acceptability of the submitted appraisals, and if it judges
                          them to be unacceptable, makes alternative valuation recommendations for the art pieces.
                          Following review by AAS, the Art Advisory Panel’s recommendations on the value of
                          appraised art property may become the position of IRS.




                          Page 15                                       GAO-12-608 Appraised Values on Tax Returns
IRS Entered into 23       In addition to their internal sources of appraisal expertise, IRS
Outside Contracts for     examination teams also may seek outside contracts with professional
Noncash Contributions,    appraisal experts to assist in reviewing taxpayers’ property valuations.
                          IRS entered into 23 contracts involving cases of noncash contributions,
Estate or Gift Tax        gift or estate taxes from fiscal years 2005 to 2011. The total amount
Examinations Involving    awarded for the 23 contracts on noncash contributions, gift and estate
Appraisals from 2005 to   taxes was $1.1 million, an average of $46,000 per contract. An IRS
2011                      procurement official said that each contract may cover appraisal services
                          for multiple properties. IRS officials said that it is more economical to hire
                          outside appraisal experts who have expertise with certain types of assets,
                          such as easements, than to have many in-house experts in highly
                          specialized areas because the appraisal caseload in such areas would
                          not support full-time staff. IRS policy requires examination teams to
                          consider the availability and expertise of in-house appraisers prior to
                          requesting the assistance of outside experts.


                          In our previous work on human capital management, we listed factors for
IRS Follows Accepted      ensuring high-performance human capital management and ensuring
Standards When            high program quality.29 Standards from our past work that are relevant to
Hiring Qualified          our review of IRS’s appraiser qualifications include

Appraisal Staff, but          having a process suitable to hire qualified staff to audit appraisals,
Gaps Exist in Training    
                               including specifically requiring appraisal expertise as a qualification;
                               formally training and educating its staff to keep up with job duties and
and Performance                individual developmental needs relevant to evaluating or auditing
                               appraisals; and
Evaluation for the Art        ensuring that staff are performing quality work during their
Appraisal Service              examinations of appraisals, including a quality review system that
                               covers appraisal skills and management oversight that evaluates
                               appraisal skills.

                          Engineering fully followed GAO’s three standards for ensuring qualified
                          staff; however, while AAS fully met the hiring standard, it did not meet the
                          other two, creating risk that staff may not be performing quality work.




                          29
                            See GAO, Human Capital: A Self-Assessment Checklist for Agency Leaders,
                          GAO/OCG-00-14G (Washington, D.C.: Sept. 1, 2000).




                          Page 16                                   GAO-12-608 Appraised Values on Tax Returns
Hiring     Engineering: The job description for appraisers in Engineering
           specifically requires applicants to have valuation and appraisal skills as a
           qualification, meeting the hiring standard. For example, the description
           says appraisers must have a “mastery of appraisal principles and
           concepts needed to serve as a technical authority.” The hiring process
           then works through a combination of automated scoring and personal
           review suitable for hiring appraisers. Announced appraiser positions
           follow the Office of Personnel Management category for appraisers,
           series GS-1171. An automated scoring system called Career Connector
           assesses applicants’ qualifications. IRS then hires from among the
           qualified applicants.

           AAS: The qualifications and hiring process for appraisers for AAS is
           similar to the procedure used by the Engineering and thus, AAS meets
           the standard.


Training   Engineering: IRS maintains a formal training program for its Engineering
           appraisers that starts with new hires and continues with advanced,
           specialized training, including training on appraisal skills to meet the GAO
           training standard. The IRM specifies two appraisal organizations—the
           American Society of Appraisers and the Appraisal Institute—that may
           acceptable continuing education. LB&I has brought in trainers for some
           courses and maintains a budget for engineers to seek outside training, as
           well. Internal engineering training documents also state that engineers
           may develop a learning plan that includes 40 hours of training every year.

           AAS: Appeals requires 24 to 40 hours of continuing education per year
           for its employees, including its AAS staff, but it does not explicitly identify
           appraisal skills as a subject for training, preventing it from meeting the
           standard. Some AAS staff members have attended conferences on visual
           arts and the law and the American Society of Appraisers National
           Conference, which appear relevant to their work. However, in contrast to
           the standard of providing training relevant to specific job duties, the
           Appeals training guidance does not mention any relevant skills that
           appraisers must maintain, leaving the possibility that appraisers are not
           keeping up their skills and not evaluating art appraisals as well as they
           could. AAS staff have discussed a more specific training program for AAS
           new hires.




           Page 17                                 GAO-12-608 Appraised Values on Tax Returns
Performance Quality     Engineering: LB&I meets the GAO standard for monitoring performance
Review and Management   quality with respect to its engineering group by subjecting its work to a
Oversight               quality review system and exercising management oversight of appraisal
                        skills. LB&I uses an audit quality assurance system as part its LB&I
                        Quality Measurement System. Having such a system enables IRS to
                        improve procedures and issue development.

                        In LB&I’s quality assurance system, engineers are measured on four
                        technical standards. The four technical standards focus on the following
                        subjects

                             planning;
                             inspecting and fact finding;
                             development, proposal, and resolution of issues; and
                             workpapers and reports.

                        Each of the technical standards includes a list of specific criteria. The
                        correct auditing of an appraisal is not specifically covered by the
                        standards. However, to the extent that an examination involved an
                        appraisal, an engineer’s work on the case would be covered under these
                        four standards. For example, IRM guidance suggests procedures that an
                        engineer should gather facts. Such a procedure would apply to gathering
                        facts on an appraisal and would be checked during a quality review. To
                        conduct the quality assurance reviews, LB&I randomly selects
                        coordinated industry cases (CIC) and industry cases (IC).30 The results
                        are reported in quarterly reports. In the first quarter of fiscal year 2011,
                        five CICs covered engineers and three ICs covered engineers. None of
                        the problems directly involved reviews of appraisal issues, but the
                        assessments found problems relating to two of the technical standards on
                        CICs and problems relating to three standards for ICs. On a more routine
                        basis, team managers are required to review case performance, including
                        technical aspects of an engineer’s work.

                        AAS: Appeals operates a case-review program called the Appeals
                        Quality Measurement System (AQMS);31 however, most of the cases that
                        AAS works are not Appeals cases and are not covered by this system.



                        30
                             The CICs cover only those reviews that exceed planned staff days by 25 percent.
                        31
                           AQMS is a system used by Appeals management that randomly selects closed cases
                        to review the quality of Appeals’ work in the aggregate, not employee performance.




                        Page 18                                        GAO-12-608 Appraised Values on Tax Returns
              Therefore, IRS does not meet the GAO quality review standard with
              respect to AAS. Given that AAS is involved in only a small percentage of
              the cases that are appealed, IRS’s Director of Tax Policy and Valuation
              said that she has been considering whether to supplement AQMS’s
              random sample with a periodic, targeted review of AAS cases. She said
              IRS’s goal is to start the reviews in fiscal year 2013. Aside from AQMS,
              IRS guidance encourages examination offices to provide feedback on
              AAS’s performance that “would be beneficial to the viability of this
              program.” The AAS manager also reviews all cases that AAS completes
              before they are issued.32 However, there is no group-wide summation or
              tracking of these reviews or assurance that AAS staff are performing well
              specifically in regard to their appraisal work, as stipulated by the
              standard. Without systematic evaluation, erosion of the quality of AAS’s
              work could occur unobserved.


              Appraisers play a large role in the amount of tax reported on estate
Conclusions   returns, but have less pronounced effects on gift and individual tax
              returns. Although IRS does not specifically target tax returns that involve
              appraisals, the policies and procedures that IRS has in place to audit
              estate, gift, and individual income tax returns ensures some coverage of
              returns that do involve appraisals. For example, IRS already gives priority
              to higher-income individual returns in the examination selection process,
              and such returns are more likely to have appraisals supporting noncash
              contributions than the general population of returns.

              There are two areas where changes might lead to reduced taxpayer
              burden or improved agency performance relating to appraisals. First, the
              fact that the $5,000 threshold at which taxpayers are required to obtain
              qualified appraisals for noncash contributions has remained unchanged
              for more than 25 years means that some contributors today must hire
              appraisers to value property that would not have needed appraisals in the
              mid-1980s, when the threshold was adopted. The high no-change rate
              that we found through our data analysis and our file review indicates that
              IRS examiners find relatively little noncompliance relating to appraisals for
              noncash contributions. This low rate of detected noncompliance implies
              that very little revenue is gained by auditing appraisals of assets worth



              32
                 IRS Appeals officials also said that they consider the Art Advisory Panel an additional
              layer of quality review, as the panel reviews AAS work.




              Page 19                                       GAO-12-608 Appraised Values on Tax Returns
                      less than $10,000. Consequently, there seems to be little risk in adjusting
                      the threshold for price inflation to better reflect the level Congress initially
                      believed was appropriate to deter noncompliance. This adjustment would
                      reduce the compliance burdens for contributors of such property and, if
                      similar adjustments were made periodically in the future, would serve to
                      maintain consistent treatment of taxpayers over time. Second, the lack of
                      appraisal training requirements for AAS appraisers and the lack of a
                      comprehensive quality control process for AAS cases put the quality of
                      potentially high-value appraisal cases involving art at risk.


                      To better ensure the quality of IRS’s examination of appraisal issues, the
Recommendations for   Commissioner of Internal Revenue should take the following two actions:
Executive Action
                         ensure that a more comprehensive quality review system for work
                          performed by AAS staff is implemented and
                         develop more specific and documented appraisal training
                          requirements for AAS staff, as LB&I has done for engineers.

                      To reduce the compliance burden on taxpayers making noncash
Matter for            contributions, Congress should consider raising the threshold at which
Congressional         taxpayers are required to have qualified appraisals for a particular
                      contribution. Raising the threshold and giving IRS the authority to adjust
Consideration         this value for inflation in the future would maintain the consistent
                      treatment of taxpayers over time.


                      We requested written comments from the Commissioner of Internal
Agency Comments       Revenue and received a letter from the IRS Deputy Commissioner for
                      Services and Enforcement on June 1, 2012 (which is reprinted in app. IV).
                      IRS agreed with our recommendations. First, it agreed that a more
                      comprehensive quality review process is appropriate for AAS, adding that
                      IRS’s goal is to supplement AQMS’s random sample with a periodic,
                      targeted review of AAS cases starting in fiscal year 2013. Additionally,
                      IRS agreed that more specific appraisal training should be provided,
                      adding that it is finalizing a more specific training curriculum for AAS
                      appraisers. IRS also provided technical comments, which we
                      incorporated into our draft.




                      Page 20                                 GAO-12-608 Appraised Values on Tax Returns
As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to interested congressional
committees, the Secretary of the Treasury, the Commissioner of Internal
Revenue, and other interested parties. In addition, the report also will be
available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-9110 or whitej@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this report
are listed in appendix V.




James R. White
Director, Tax Issues
Strategic Issues




Page 21                               GAO-12-608 Appraised Values on Tax Returns
Appendix I: Scope and Methodology
                        Appendix I: Scope and Methodology




                        This appendix provides further details on the methodologies that we used
                        to estimate (1) the extent to which appraisals are an issue for estate and
                        gift tax returns and for returns of individuals making noncash charitable
                        contributions and (2) the rates at which the Internal Revenue Service
                        (IRS) audits returns with potential appraisal issues. It also explains how
                        we identified cases for our file review and how we obtained data on IRS’s
                        use of contractors.


                        The purposes of this section are to document (1) how we have placed the
Estate Tax              various assets, exclusions, and deductions reported on Forms 706 into
                        three groups based on the likeliness that a substantial appraisal was
                        needed to value a particular item and (2) how we identified specific estate
                        tax returns as being likely to have involved a substantial appraisal.1 Data
                        for this analysis came from the Statistics of Income (SOI) estate tax
                        samples for filing years 2007 through 2009 (the latest years available at
                        the time of our analysis). After identifying these various subgroups of
                        taxpayers, we used their taxpayer identification numbers to extract data
                        from the Enforcement Revenue Information System (ERIS) regarding any
                        examinations they underwent for the tax years included in our scope. We
                        converted all dollar amounts into 2012 dollars by multiplying them by the
                        ratio of the 2012 index value for the gross domestic product (GDP) price
                        deflator over the index value for the applicable year of death.


Identifying Assets,     IRS technical advisors for estate and gift tax examinations identified the
Deductions, and         following assets, deductions or exclusions as being likely to involve an
Exclusions Likely to    appraiser.
Involve a Substantial      Retirement plans
Appraisal                  Personal residences


                        1
                          For purposes of the estate and gift tax components of our analysis, we define “appraisal”
                        to mean any method used to support the value of an asset, exclusion, or deduction on an
                        estate or gift tax return (this definition should not to be confused with the use of “qualified
                        appraisal” in reference to noncash charitable contributions, which has a more specific
                        legal meaning). We then further break down the term “appraisal” supporting an estate or
                        gift tax return into two categories: simple and substantial. A simple appraisal consists of
                        unsophisticated comparisons that would support the value of an asset, exclusion or
                        deduction—such as referring to statements from a financial institution or to a published
                        price for financial assets. A “substantial appraisal” involves a professional or independent
                        expert using specialized knowledge or professional appraisal techniques to support an
                        asset’s value.




                        Page 22                                         GAO-12-608 Appraised Values on Tax Returns
Appendix I: Scope and Methodology




   Improved real estate
   Undeveloped land
   Real estate partnerships
   Closely held stock
   Farm assets and farm land
   Private equity and hedge funds
   Other limited partnerships
   Other non-corporate businesses
   Art
   Depletable/intangible
   Family limited partnership, tax value
   Conservation easements

The IRS technical advisors identified the following items that are included
in the SOI dataset as being unlikely to involve an appraiser.

   Cash
   Publicly traded stock
   Real estate mutual funds
   Federal, state, local, corporate, and foreign bonds and bond funds
   Other mutual funds
   Insurance, face value
   Insurance, policy loans
   Funeral expenses
   Executors’, attorneys’, and accountants’ commissions and fees
   Schedule L and K debts and mortgages

The following categories contain assortments of assets or deductions that
cannot be individually identified as being likely or unlikely to involve
appraisers.

   Other assets
   Mortgages and notes
   Other expenses and losses
   Bequests to surviving spouse
   Qualified terminable income property
   Charitable bequest deduction




Page 23                               GAO-12-608 Appraised Values on Tax Returns
                             Appendix I: Scope and Methodology




Identifying Returns Likely   We identified “returns with over $50,000 in any asset, deduction, or
or Unlikely to Have Had at   exclusion category likely to involve an appraiser” as those cases with
Least $50,000 in at Least    more than $50,000 (in absolute value) in any category from the list of
                             property likely to involve an appraiser above. We identified “returns with
One Category of Assets,      no more than $50,000 in every asset, deduction, or exclusion category
Deductions, or Exclusions    likely to involve an appraiser” as those cases with no more than $50,000
That Would Have Required     (in absolute value) in any category listed in either the first or third lists of
the Involvement of an        property above.
Appraiser
Determining Taxability and   We identified taxable estates as those with positive values for net estate
the Buffer before            tax. We defined the “buffer” before an estate would become taxable as
Taxability Begins            the amount by which total gross estate less exclusion would have to
                             increase or total deductions would have to decrease (holding credits
                             constant) before an estate would become taxable. In other words, if a
                             taxpayer has a buffer of $100,000, it would take some combination of
                             increases in asset valuations or decreases in the value of exclusions and
                             deductions summing to more than $100,000 before any exam
                             adjustments would result in a tax increase.


Extracting Exam Data         We asked IRS to extract selected data from the ERIS database for the
from ERIS                    sample of estate taxpayers we identified from the SOI data. We counted
                             any case that had a match in ERIS as having been audited.


                             The methodology that we used for the gift tax is similar to the one that we
Gift Tax                     used above for the estate tax. The principal differences are that, first, we
                             use a lower dollar limit ($25,000 rather than $50,000) in some of our
                             comparisons because the size of the average gift is significantly smaller
                             than the size of the average estate, and, second, we do not distinguish
                             between taxable and nontaxable gift tax returns. (Many gift tax returns are
                             not taxable; however, the amounts reported on these returns can
                             ultimately affect the amounts of tax paid on estate tax returns.) The data
                             used for this analysis come from SOI’s sample of gift tax returns filed in
                             2007 through 2009, the latest available at the time of our analysis. The
                             property and deduction categories recorded from these returns are
                             slightly different from those recorded from the estate tax returns. We
                             converted all dollar amounts into 2012 dollars by multiplying them by the
                             ratio of the 2012 index value for the GDP price deflator over the index
                             value for the applicable gift year.




                             Page 24                                  GAO-12-608 Appraised Values on Tax Returns
                              Appendix I: Scope and Methodology




Identifying Gifts Likely to   IRS technical advisors for estate and gift tax examinations identified the
Involve a Substantial         following gifts as being likely to involve an appraiser.
Appraisal
                                 Retirement plans
                                 Personal residence
                                 Real estate, improved
                                 Undeveloped land
                                 Real estate partnerships
                                 Closely held stock
                                 Farm assets and farm land
                                 Private equity and hedge funds
                                 Other limited partnerships
                                 Other non-corporate businesses
                                 Art
                                 Depletable/intangible

                              The IRS technical advisors identified the following gifts that are included
                              in the SOI dataset as being unlikely to involve an appraiser.

                                 Cash
                                 Publicly traded stock
                                 Federal, state, local, corporate, and foreign bonds and bond funds
                                 Real estate mutual funds
                                 Other mutual funds
                                 Insurance, face value
                                 Insurance, policy loans
                                 Loans on personal residence
                                 Loans on other real estate
                                 Futures and commodities
                                 Annuities
                                 Nominal gifts

                              The following categories contain assortments of gifts that cannot be
                              individually identified as being likely or unlikely to involve appraisers.

                                 Mortgages and notes
                                 Other assets
                                 Adjustments
                                 Gifts to other donees




                              Page 25                                 GAO-12-608 Appraised Values on Tax Returns
                              Appendix I: Scope and Methodology




                              To estimate the extent to which appraisals are used to support noncash
Noncash Charitable            contributions, we first reviewed IRS requirements for recording appraisals
Contributions                 on Form 8283, Noncash Charitable Contributions. Next, we used data
                              from SOI’s annual studies of noncash contributions relating to the
                              amounts and types of contributions that taxpayers reported on various
                              parts of Form 8283 from tax years 2005 through 2008 (the latest years
                              available at the time of our analysis) to (1) identify an upper bound for the
                              number of taxpayers who potentially required qualified appraisals to
                              support noncash contribution deductions claimed on Form 1040,
                              Schedule A, Line 17, and (2) determine how many Form 8283 filers we
                              could identify as either being likely to require a qualified appraisal or
                              unlikely to require one. Filtering the SOI data involved the following steps.


Excluding Filers Who Did      Qualified appraisals are not required for any donations reported in
Not Claim Any Deductions      Section A of Form 8283; therefore, we excluded Form 8283 filers who did
for Donations Reported in     not report any contributions in Section B of the form. Furthermore, if a
                              taxpayer reports a donation in Section B but does not carry any amount to
Section B of Form 8283        Schedule A of the Form 1040, the taxpayer is not actually claiming any
                              deduction for that donation. Consequently, we excluded all filers that did
                              not have a positive value for the amount carried from Section B to
                              Schedule A for any donation.


Excluding Certain             Taxpayers should not need a qualified appraisal if either of the following
Additional Taxpayers Who      two conditions is met: the total amount moved from Section B to Schedule
Reported Amounts in           A for all donations is less than or equal to $5,000, or the only type of
                              donation reported in Section B is intellectual property. We removed all
Section B but Should Not      such cases.
Have Needed Qualified
Appraisals

Classifying the Remaining     SOI assigns each donation reported in Form 8283 Section B to one of 19
Form 8283 Filers for          different property-type categories. Donations in five of these categories
Reporting Purposes            (real estate except conservation easements, land, conservation
                              easements, façade easements, and art and collectibles) need qualified
According to the Likeliness   appraisals unless they come from a business’s stock in trade, inventory,
of Their Needing a            or property held primarily for sale to customers in the ordinary course of
Qualified Appraisal           its trade or business. We believe that this exception is not likely to apply
                              to properties in the first four of these five categories.




                              Page 26                                GAO-12-608 Appraised Values on Tax Returns
Appendix I: Scope and Methodology




To identify donations of art and collectibles that potentially could have
qualified for the exception, we did the following:

1. For those filers who made a donation in this category, we used data
   from SOI’s 1040 tax files to determine whether they had a Schedule
   C2 business in any of the following listed industry: 3
      Art dealers
      Independent artists
      Jewelry stores
      Jewelry, watch, etc., wholesalers
      Beverage and tobacco product manufacturing (wineries are
       included in this category)
      Beer, wine, and liquor stores
      Beer, wine and distilled spirits wholesalers

2. We assigned any of these filers that had at least one Schedule C in
   one of these industries a code that indicates that they potentially had
   an exception.

Donations in two property categories, corporate stock and mutual funds,
are excepted from needing qualified appraisals if they have readily
available market quotations or are less than $10,000. This exception can
also apply to securities, such as bonds, that are reported in the “other
securities and investments” category. We had no way of reliably
identifying which of the securities in these categories had readily available
quotations, so we did not attempt to identify individual donations as being
excepted or not. However, within the “securities and other investments”
category, we did identify bond donations using the taxpayers’ descriptions
of their donations on line 5(a) and assigned them a code indicating that
they were potentially excepted, which distinguished them from other
donations in that category that were not excepted.




2
  Individual taxpayers who have income or losses from businesses that they operate or
from professions they practice must report the income or loss on Schedule C of Form
1040.
3
  Given that we are concerned only with individual taxpayers, the only types of business
inventories relevant to these deductions would be those of sole proprietorships (Schedule
C) or partnerships. To the extent that any of the filers in our sample made only excepted
contributions of inventories through a partnership our results will overstate the number of
taxpayers requiring a qualified appraisal.




Page 27                                       GAO-12-608 Appraised Values on Tax Returns
Appendix I: Scope and Methodology




Donations in the categories that do not involve securities may qualify for
the inventory exceptions, and vehicle donations can be excepted under
additional special conditions. Aside from the “other and unknown”
category, donations in the nonsecurities categories, taken individually,
account for very small shares of the total value of noncash contribution
deductions. The “other and unknown” category accounts for about 6
percent to about 9 percent of the total value of deductions, depending on
the year. In some of these cases the type of property donated is truly
unknown because the description simply indicates that the donation was
made by a partnership owned by the taxpayer. The remaining donations
are of such variety that it would be difficult to apply the approach that we
have set out above for identifying donations that potentially qualified for
the inventory exception.

After we completed all of steps described above, we grouped Form 8283
filers into the following categories:

1. Filers who had a donation in at least one of the following property
   categories:
      Real estate (except conservation easements)
      Land
      Conservation easements
      Façade easements
      Other securities and investments (excluding donations of bonds)
      Art and collectibles (excluding donations identified as potentially
       qualifying for the inventory exception)

2. Filers who had donations only in one of the following property
   categories:
      Corporate stock
      Mutual funds
      Bonds

3. All remaining filers with Section B donations that did not meet the
   criteria for the first two categories.

Filers in the first category, on average, are more likely to have appraisals
than those in the other two categories; filers in the second category, on
average, are less likely to have appraisals than those in the other two
categories. We converted all dollar amounts into 2012 dollars by
multiplying them by the ratio of the 2012 index value for the GDP price
deflator over the index value for the applicable tax year.




Page 28                                GAO-12-608 Appraised Values on Tax Returns
                          Appendix I: Scope and Methodology




Obtaining Data on Audit   We asked IRS to extract selected data from the Examination Operational
Rates and Audit Issues    Automation Database (EOAD) for the sample of taxpayers that SOI had
                          identified as having made noncash contributions. We counted any case
                          that had a match in EOAD as having been audited. We identified cases
                          as having had noncash contributions raised as an audit issue based on
                          the form and line codes plus the Standard Accounting Identification
                          Number recorded in that database. Given the limitations of the issue
                          coding in the database, we can report on adjustments relating to noncash
                          contributions but not specifically relating to the appraisals of those
                          contributions. We identified audits in which noncash contributions were an
                          issue as having been no-change cases if the agreed adjustment amount
                          for that issue was zero. We used the results of our data matching for tax
                          year 2008 to identify the cases for which we requested examination files
                          to review. We reviewed the cases using a data collection instrument at
                          IRS’s New Carrollton, Maryland, office.


                          We conducted this performance audit from October 2010 through June
                          2012 in accordance with generally accepted government auditing
                          standards. Those standards require that we plan and perform the audit to
                          obtain sufficient, appropriate evidence to provide a reasonable basis for
                          our findings and conclusions based on our audit objectives. We believe
                          that the evidence obtained provides a reasonable basis for our findings
                          and conclusions based on our audit objectives.




                          Page 29                              GAO-12-608 Appraised Values on Tax Returns
Appendix II: Appraisal Reporting
                     Appendix II: Appraisal Reporting
                     Requirements for Noncash Contributions and
                     Gift and Estate Taxes


Requirements for Noncash Contributions and
Gift and Estate Taxes
                     IRS has established rules and procedures for taxpayers to follow when
                     using appraisals to support noncash charitable contributions, estate, and
                     gift tax claims.


                     Within certain conditions, taxpayers must use qualified prepared
Noncash Charitable   appraisals to support noncash-contribution deductions on Form 1040,
Contributions        Schedule A. Taxpayers list the total value of noncash contributions on
                     Schedule A, line 17. Taxpayers claiming noncash charitable contributions
                     over $500 must submit Form 8283, Noncash Charitable Contributions,
                     which has two sections. In Section A of the form, taxpayers report
                     noncash contributions that do not require qualified appraisals. Such
                     contributions include items, or groups of similar items,1 with a claimed
                     deduction of $5,000 or less, and securities of any value with readily
                     available market quotations.2 For contributions more than $5,000,
                     taxpayers must have an appraisal done and fill out Section B of Form
                     8283. Exceptions to the $5,000 threshold include

                        nonpublicly traded stock of $10,000 or less;
                        vehicles if the deduction is limited to gross proceeds from sale;
                        intellectual property;
                        certain securities considered to have market quotations readily
                         available;
                        inventory and property donated by corporations that are “qualified
                         contributions” for the care of the ill or infants; and
                        stock in trade, inventory, or property held primarily for sale to
                         customers.

                     Figure 2 shows the section of Form 8283 where taxpayers provide
                     descriptions and appraised values of donated property valued at more
                     than $5,000. Taxpayers are required to attach the written appraisals to
                     the return only for contributions of art valued at $20,000 or more, any
                     deduction of more than $500,000, contributions of easements on
                     buildings in historic districts, and deductions of more than $500 for
                     clothing and household items not in good use condition. Charitable



                     1
                      Similar items are those that fall under the same category or type, such as paintings, coin
                     collections, jewelry, buildings, and nonpublicly traded stocks.
                     2
                       Securities with restrictions, even if they have readily available market quotations, may
                     require qualified appraisals.




                     Page 30                                        GAO-12-608 Appraised Values on Tax Returns
                                         Appendix II: Appraisal Reporting
                                         Requirements for Noncash Contributions and
                                         Gift and Estate Taxes




                                         organizations that receive contributions listed in Section B of Form 8283
                                         generally must report them to IRS on Form 8282.

Figure 2: Form 8283, Section B, Part I, Reporting Instructions for Noncash Charitable Contributions over $5,000




                                         Page 31                                      GAO-12-608 Appraised Values on Tax Returns
                     Appendix II: Appraisal Reporting
                     Requirements for Noncash Contributions and
                     Gift and Estate Taxes




                     IRS requires that taxpayers support the claimed value of property in
Estate Tax Returns   estate transfers with an appraisal, which could be a written appraisal by a
                     professional appraiser, but does not have to be in every situation. The
                     body of law covering qualified appraisals for noncash charitable
                     contributions does not apply to estate or gift taxes. Taxpayers may owe
                     taxes on the property of an estate transferred at death, if the gross value
                     of the estate exceeds annually established exclusion levels. The
                     exclusion levels for the estates of those who died in certain recent years
                     were $1.5 million for 2004 to 2005, $2 million for 2006 to 2008,
                     $3.5 million for 2009, and $5 million for 2010 to 2012. Following
                     taxpayers’ deaths, appointed estate executors file estate returns on Form
                     706, United States Estate (and Generation-Skipping Transfer) Tax Return
                     if the estate is worth more than the annual exclusion. Appointed
                     executors must include explanation or documentation detailing how the
                     value of estate property was determined. Written appraisals prepared by
                     professional appraisers are one of the acceptable valuation methods, and
                     appropriate documentation will vary depending on the type of asset.
                     However, written appraisals are required to support the value of real
                     property claimed in Schedule A-1, artwork or collectibles worth more than
                     $3,000 individually or more than $10,000 collectively claimed in Schedule
                     F, and conservation easement exclusions reported in Schedule U.


                     Taxpayers may be subject to taxes on property transferred as gifts and
Gift Tax Returns     must provide valuation support for the property’s claimed value. Gifts may
                     be taxable if their value exceeds annually established exclusion values.
                     The exclusion levels for gift transfers in recent years were $10,000 from
                     1998 to 2001, $11,000 from 2002 to 2005, $12,000 from 2006 to 2008,
                     and $13,000 from 2009 to the present. Gift donors file gift returns on
                     Form 709, United States Gift (and Generation-Skipping Transfer) Tax
                     Return, if gifts exceed the exclusion value. Donors must list taxable gifts
                     in Schedule A and include one of a number of acceptable valuation
                     documents, among them a written appraisal prepared by a professional
                     appraiser, or an explanation of how the value was determined. For
                     calendar year 2007, IRS recorded 257,485 donors who transferred
                     $45.2 billion in gifts. Less than 4 percent of all gift returns were taxable,
                     accounting for $2.8 billion in gift taxes. Three types of assets—cash,
                     stock, and real estate—accounted for 87 percent of all gifts.




                     Page 32                                      GAO-12-608 Appraised Values on Tax Returns
                     Appendix II: Appraisal Reporting
                     Requirements for Noncash Contributions and
                     Gift and Estate Taxes




                     For noncash charitable contributions, the Pension Protection Act (PPA) of
Penalty Thresholds   2006 lowered the threshold for substantial valuation misstatements from
and Valuation        200 percent of the correct valuation to 150 percent. Substantial valuation
                     misstatements subject the taxpayer to a penalty equal to 20 percent of
Misstatements        the underpayment attributable to the misstatement. For estate and gift
                     property, PPA increased the threshold for substantial valuation
                     understatements from 50 percent to 65 percent. Gross valuation
                     misstatements on any return are subject to an increased penalty equal to
                     40 percent of the portion of the underpayment attributable to the
                     misstatement. For noncash charitable contributions, PPA lowered the
                     threshold for gross valuation misstatement from 400 percent of the
                     correct valuation to 200 percent. For estate or gift property, PPA raised
                     the threshold for gross valuation understatements from 25 percent to 40
                     percent of the supported value.




                     Page 33                                      GAO-12-608 Appraised Values on Tax Returns
Appendix III: Tables on Appraisal Usage and
                                              Appendix III: Tables on Appraisal Usage and
                                              IRS Appraisal Enforcement



IRS Appraisal Enforcement

                                              Tables 2 through 12 contain data on appraisal usage and IRS’s appraisal
                                              enforcement.

Table 2: Number of Estate Tax Returns Filed in 2007 through 2009, by Likeliness of Having a Valuation Done by an Appraiser

In thousands
                                                                                                     Lower bound                 Upper bound
                                                                                                     of 95 percent               of 95 percent
                                                                                  Estimate     confidence interval         confidence interval
Estate tax returns filed in 2009a
Returns with over $50,000 in any asset, deduction, or exclusion
category likely to involve an appraiser                                               30.5                       30.2                        30.8
Returns with no more than $50,000 in every asset, deduction, or
exclusion category likely to involve an appraiser                                      0.9                        0.7                          1.2
Returns that could not be classified into either of the preceding
groups                                                                                 0.8                        0.6                          1.0


Estate tax returns filed in 2008
Returns with over $50,000 in any asset, deduction, or exclusion
category likely to involve an appraiser                                               34.8                       34.6                        35.1
Returns with no more than $50,000 in every asset, deduction, or
exclusion category likely to involve an appraiser                                      1.0                        0.9                          1.2
Returns that could not be classified into either of the preceding
groups                                                                                 1.2                        1.0                          1.4


Estate tax returns filed in 2007
Returns with over $50,000 in any asset, deduction, or exclusion
category likely to involve an appraiser                                               34.0                       33.7                        34.3
Returns with no more than $50,000 in every asset, deduction, or
exclusion category likely to involve an appraiser                                      1.4                        1.2                          1.6
Returns that could not be classified into either of the preceding
groups                                                                                 1.4                        1.2                          1.6
                                              Source: GAO analysis of IRS data.
                                              a
                                              IRS reports that 33,515 estate tax returns were filed in 2009; 38,354 in 2008; and 38,000 in 2007.




                                              Page 34                                            GAO-12-608 Appraised Values on Tax Returns
                                           Appendix III: Tables on Appraisal Usage and
                                           IRS Appraisal Enforcement




Table 3: Absolute Value of Assets, Deductions, and Exclusions Reported on Estate Tax returns, by Likeliness of Having a
Valuation Done by an Appraiser

Dollars in billions
                                                                                                   Lower bound                  Upper bound
                                                                                                   of 95 percent                of 95 percent
                                                                               Estimate      confidence interval          confidence interval
All items reported in 2009                                                       $257.0                      $255.0                       $259.0
Items likely to involve an appraiser                                               76.8                         75.6                        78.1
Items unlikely to involve an appraiser                                             93.2                         92.0                        94.5
Items for which appraiser involvement is indeterminable                            86.9                         85.2                        88.5


All items reported in 2008                                                       $294.3                      $292.6                       $296.1
Items likely to involve an appraiser                                               87.0                         85.8                        88.1
Items unlikely to involve an appraiser                                            109.7                       108.6                        110.8
Items for which appraiser involvement is indeterminable                            97.7                         96.3                        99.1


All items reported in 2007                                                       $278.4                      $276.6                       $280.2
Items likely to involve an appraiser                                               83.0                         81.8                        84.2
Items unlikely to involve an appraiser                                            104.8                       103.6                        106.0
Items for which appraiser involvement is indeterminable                            90.6                         89.1                        92.1
                                           Source: GAO analysis of IRS data.

                                           Note: Dollar figures have been adjusted for inflation to 2012 dollars using the U.S. GDP deflator.
                                           Detail may not sum to total because of rounding.




                                           Page 35                                             GAO-12-608 Appraised Values on Tax Returns
                                              Appendix III: Tables on Appraisal Usage and
                                              IRS Appraisal Enforcement




Table 4: Number of Gift Tax Returns Filed in 2007 through 2009, by Likeliness of Having a Valuation Done by an Appraiser

In thousands
                                                                                                     Lower bound                 Upper bound
                                                                                                     of 95 percent               of 95 percent
                                                                                  Estimate     confidence interval         confidence interval
Gift tax returns filed in 2009a
Returns with over $25,000 in any gift, deduction, or exclusion
category likely to involve an appraiser                                               38.2                       34.2                         42.2
Returns with no more than $25,000 in any gift, deduction, or
exclusion category likely to involve an appraiser                                    196.3                      196.0                       196.5
Returns that could not be classified into either of the preceding
groups                                                                                 0.2                         0.1                         0.5


Gift tax returns filed in 2008
Returns with over $25,000 in any gift, deduction, or exclusion
category likely to involve an appraiser                                               43.7                       37.3                         50.0
Returns with no more than $25,000 in any gift, deduction, or
exclusion category likely to involve an appraiser                                    213.3                      212.9                       213.5
Returns that could not be classified into either of the preceding
groups                                                                                 0.6                         0.3                         0.9


Gift tax returns filed in 2007
Returns with over $25,000 in any gift, deduction, or exclusion
category likely to involve an appraiser                                               41.2                       38.6                         43.8
Returns with no more than $25,000 in any gift, deduction, or
exclusion category likely to involve an appraiser                                    201.7                      201.2                       202.1
Returns that could not be classified into either of the preceding
groups                                                                                 0.8                         0.4                         1.3
                                              Source: GAO analysis of IRS data.
                                              a
                                              IRS reports that 234,714 gift tax returns were filed in 2009; 257,485 in 2008; and 243,686 in 2007.




                                              Page 36                                            GAO-12-608 Appraised Values on Tax Returns
                                           Appendix III: Tables on Appraisal Usage and
                                           IRS Appraisal Enforcement




Table 5: Absolute Value of Assets, Deductions, and Exclusions Reported on Gift Tax Returns, by Likeliness of Having a
Valuation Done by an Appraiser

Dollars in billions
                                                                                                   Lower bound                  Upper bound
                                                                                                   of 95 percent                of 95 percent
                                                                               Estimate      confidence interval          confidence interval
All items reported in 2009                                                        $40.0                       $39.4                        $40.5
Items likely to involve an appraiser                                               14.0                         13.4                        14.7
Items unlikely to involve an appraiser                                             24.7                         24.0                        25.3
Items for which appraiser involvement is indeterminable                              1.3                         1.1                            1.4


All items reported in 2008                                                        $45.1                       $44.3                        $45.8
Items likely to involve an appraiser                                               15.0                         14.3                        15.7
Items unlikely to involve an appraiser                                             29.2                         28.4                        30.0
Items for which appraiser involvement is indeterminable                              0.9                         0.8                            1.0


All items reported in 2007                                                        $38.9                       $38.5                        $39.3
Items likely to involve an appraiser                                               14.0                         13.5                        14.5
Items unlikely to involve an appraiser                                             24.2                         23.7                        24.7
Items for which appraiser involvement is indeterminable                              0.7                         0.6                            0.8
                                           Source: GAO analysis of IRS data.

                                           Note: Dollar figures have been adjusted for inflation to 2012 dollars using the U.S. GDP deflator.
                                           Detail may not sum to total because of rounding.




                                           Page 37                                             GAO-12-608 Appraised Values on Tax Returns
                                               Appendix III: Tables on Appraisal Usage and
                                               IRS Appraisal Enforcement




Table 6: Number of Taxpayers Reporting Amounts in Section B of Form 8283 in 2005 through 2008, by Likeliness of Needing a
Qualified Appraisal

In thousands
                                                                                                      Lower bound           Upper bound
                                                                                                      of 95 percent         of 95 percent
                                                                                   Estimate     confidence interval   confidence interval
All 2008 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              76.0                   76.0                    76.0
Returns identifiable as likely to involve a qualified appraisal                        21.9                   16.2                    27.6
Returns identifiable as unlikely to involve a qualified appraisal                       5.9                     3.5                    9.3
Returns whose likeliness could not be determined                                       48.2                   37.4                    58.9


All 2007 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              72.7                   72.6                    7.27
Returns identifiable as likely to involve a qualified appraisal                        19.4                   15.1                    23.8
Returns identifiable as unlikely to involve a qualified appraisal                      12.0                     8.4                   16.2
Returns whose likeliness could not be determined                                       41.3                   31.9                    50.6


All 2006 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              73.5                   73.5                    73.5
Returns identifiable as likely to involve a qualified appraisal                        24.8                   18.3                    31.2
Returns identifiable as unlikely to involve a qualified appraisal                       7.0                     5.3                    9.1
Returns whose likeliness could not be determined                                       41.8                   32.5                    51.1


All 2005 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              56.9                   56.8                    56.9
Returns identifiable as likely to involve a qualified appraisal                        22.4                   17.4                    27.4
Returns identifiable as unlikely to involve a qualified appraisal                       7.4                     5.4                    9.8
Returns whose likeliness could not be determined                                       27.0                   19.9                    34.2
                                               Source: GAO analysis of IRS data.

                                               Note: Detail may not sum to total because of rounding.




                                               Page 38                                           GAO-12-608 Appraised Values on Tax Returns
                                               Appendix III: Tables on Appraisal Usage and
                                               IRS Appraisal Enforcement




Table 7: Value of Deductions Reported in Section B of Form 8283 in 2005 through 2008, by Likeliness of Taxpayer Needing at
Least One Qualified Appraisal

Dollars in billions
                                                                                                       Lower bound                  Upper bound
                                                                                                       of 95 percent                of 95 percent
                                                                                   Estimate      confidence interval          confidence interval
Amounts reported on all 2008 returns with more than
$5,000 in deductions for noncash contributions carried
from Section B of Form 8283                                                            $8.8                         $7.8                        $9.9
Returns identifiable as likely to involve a qualified appraisal                          6.3                         5.3                            7.4
Returns identifiable as unlikely to involve a qualified appraisal                        1.0                         0.9                            1.1
Returns whose likeliness could not be determined                                         1.5                         1.3                            1.7


Amounts reported on all 2007 returns with more than
$5,000 in deductions for noncash contributions carried
from Section B of Form 8283                                                           $14.6                       $10.4                        $18.7
Returns identifiable as likely to involve a qualified appraisal                        10.6                          6.8                        14.3
Returns identifiable as unlikely to involve a qualified appraisal                        1.7                         1.5                            1.8
Returns whose likeliness could not be determined                                         2.4                         0.6                            4.1


Amounts reported on all 2006 returns with more than
$5,000 in deductions for noncash contributions carried
from section B of form 8283                                                           $12.6                       $11.8                        $13.4
Returns identifiable as likely to involve a qualified appraisal                          8.4                         7.6                            9.1
Returns identifiable as unlikely to involve a qualified appraisal                        2.9                         2.8                            3.1
Returns whose likeliness could not be determined                                         1.3                         1.1                            1.5


Amounts reported on all 2005 returns with more than
$5,000 in deductions for noncash contributions carried
from section B of form 8283                                                           $11.6                       $10.0                        $13.1
Returns identifiable as likely to involve a qualified appraisal                          9.0                         7.5                        10.6
Returns identifiable as unlikely to involve a qualified appraisal                        1.2                         1.0                            1.3
Returns whose likeliness could not be determined                                         1.4                         1.1                            1.7
                                               Source: GAO analysis of IRS data.

                                               Note: Dollar figures have been adjusted for inflation to 2012 dollars using the U.S. GDP deflator.
                                               Detail may not sum to total because of rounding.




                                               Page 39                                             GAO-12-608 Appraised Values on Tax Returns
                                            Appendix III: Tables on Appraisal Usage and
                                            IRS Appraisal Enforcement




Table 8: Audit Rates for Estate Tax Returns Filed in 2007 through 2009, by Likeliness of Having a Valuation Done by an
Appraiser

Percentages
                                                                                                      Lower bound                  Upper bound
                                                                                                      of 95 percent                of 95 percent
                                                                                Estimate        confidence interval          confidence interval
                         a
All returns filed in 2009
Returns with over $50,000 in any asset, deduction, or exclusion
category likely to involve an appraiser                                               10.9                           9.9                        12.0
Returns with no more than $50,000 in every category likely to
involve an appraiser                                                                  19.0                         10.9                         29.7
All taxable or near taxable returns                                                   11.2                         10.2                         12.3
All returns with estate values more than $100,000 below the
taxable level                                                                          0.5                           0.1                        13.2
Taxable or near taxable returns with over $50,000 in any
category likely to involve an appraiser                                               11.0                           9.9                        12.1


All returns filed in 2008
Returns with over $50,000 in any asset, deduction, or exclusion
category likely to involve an appraiser                                               10.6                           9.9                        11.3
Returns with no more than $50,000 in every category likely to
involve an appraiser                                                                  11.9                           7.5                        17.6
All taxable or near taxable returns                                                   10.8                         10.0                         11.5
All returns with estate values more than $100,000 below the
taxable level                                                                          0.5                           0.0                          3.8
Taxable or near taxable returns with over $50,000 in any
category likely to involve an appraiser                                               10.8                         10.1                         11.6


All returns filed in 2007
Returns with over $50,000 in any asset, deduction, or exclusion
category likely to involve an appraiser                                                7.6                           7.0                          8.2
Returns with no more than $50,000 in every category likely to
involve an appraiser                                                                   5.9                           2.7                        11.0
All taxable or near taxable returns                                                    8.2                           7.5                          8.9
All returns with estate values more than $100,000 below the
taxable level                                                                          0.9                           0.3                          1.9
Taxable or near taxable returns with over $50,000 in any
category likely to involve an appraiser                                                8.3                           7.6                          9.0
                                            Source: GAO analysis of IRS data.
                                            a
                                             IRS reports that the audit rate for all estate tax returns filed in 2009 was 10.1 percent. The audit rates
                                            for 2008 and 2007 were 9.3 and 8.1 percent, respectively.




                                            Page 40                                               GAO-12-608 Appraised Values on Tax Returns
                                             Appendix III: Tables on Appraisal Usage and
                                             IRS Appraisal Enforcement




Table 9: Audit Rates for Gift Tax Returns Filed in 2007 through 2009, by Likeliness of Having a Valuation Done by an
Appraiser

Percentages
                                                                                                        Lower bound                   Upper Bound
                                                                                                        of 95 percent                 of 95 percent
                                                                                 Estimate         confidence interval           confidence interval
                         a
All returns filed in 2009
Returns with over $25,000 in any gift, deduction, or exclusion
category likely to involve an appraiser                                                  0.8                           0.5                           1.3
Returns with no more than $25,000 in any gift, deduction, or
exclusion category likely to involve an appraiser                                        0.1                           0.0                           0.2


All returns filed in 2008
Returns with over $25,000 in any gift, deduction, or exclusion
category likely to involve an appraiser                                                  1.3                           0.9                           1.8
Returns with no more than $25,000 in any gift, deduction, or
exclusion category likely to involve an appraiser                                        0.1                           0.0                           0.2


All returns filed in 2007
Returns with over $25,000 in any gift, deduction, or exclusion
category likely to involve an appraiser                                                  1.1                           0.8                           1.6
Returns with no more than $25,000 in any gift, deduction, or
exclusion category likely to involve an appraiser                                        0.2                           0.1                           0.3
                                             Source: GAO analysis of IRS data.
                                             a
                                              IRS reports that the audit rate for all gift tax returns filed in 2009 was 0.7 percent. The audit rates for
                                             2008 and 2007 were 0.6 and 0.4 percent, respectively.




                                             Page 41                                                GAO-12-608 Appraised Values on Tax Returns
                                              Appendix III: Tables on Appraisal Usage and
                                              IRS Appraisal Enforcement




Table 10: Audit Rates for Taxpayers Reporting Amounts in Section B of Form 8283 in 2005 through 2008, by Likeliness of
Needing a Qualified Appraisal

Percentage
                                                                                                   Lower bound           Upper bound
                                                                                                   of 95 percent         of 95 percent
                                                                                  Estimate   confidence interval   confidence interval
All 2008 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              1.4                   0.3                    3.7
Returns likely to involve a qualified appraisal                                        3.2                   0.3                   12.0
Returns unlikely to involve a qualified appraisal                                      1.5                   0.3                    3.9
Returns with adjusted gross income under $200,000                                      0.3                   0.0                    1.3
Returns with adjusted gross income above or equal to $200,000                          3.5                   0.7                    9.9


All 2007 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              4.1                   2.2                    6.7
Returns likely to involve a qualified appraisal                                        4.2                   2.0                    7.6
Returns unlikely to involve a qualified appraisal                                      1.7                   0.8                    3.2
Returns with adjusted gross income under $200,000                                      0.5                   0.0                    2.9
Returns with adjusted gross income above or equal to $200,000                          7.4                   4.1                   12.2


All 2006 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              2.8                   1.4                    4.9
Returns likely to involve a qualified appraisal                                        2.2                   1.0                    4.0
Returns unlikely to involve a qualified appraisal                                      7.0                   1.0                   21.8
Returns with adjusted gross income under $200,000                                      1.8                   0.4                    5.1
Returns with adjusted gross income above or equal to $200,000                          4.4                   2.2                    7.8


All 2005 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              2.0                   1.2                    3.1
Returns likely to involve a qualified appraisal                                        2.4                   1.2                    4.3
Returns unlikely to involve a qualified appraisal                                      0.4                   0.1                    1.3
Returns with adjusted gross income under $200,000                                      0.5                   0.0                    2.9
Returns with adjusted gross income above or equal to $200,000                          3.4                   2.1                    5.4
                                              Source: GAO analysis of IRS data.




                                              Page 42                                         GAO-12-608 Appraised Values on Tax Returns
                                              Appendix III: Tables on Appraisal Usage and
                                              IRS Appraisal Enforcement




Table 11: Rates of Audit That Included Noncash Contributions as an Issue for Taxpayers Reporting Amounts in Section B of
Form 8283 in 2005 through 2008, by Likeliness of Needing a Qualified Appraisal

Percentages
                                                                                                   Lower bound           Upper bound
                                                                                                   of 95 percent         of 95 percent
                                                                                  Estimate   confidence interval   confidence interval
All 2008 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              0.2                   0.1                    0.5
Returns likely to involve a qualified appraisal                                        0.4                   0.1                    1.3
Returns unlikely to involve a qualified appraisal                                      0.8                   0.0                    3.7


All 2007 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              1.2                   0.6                    2.1
Returns likely to involve a qualified appraisal                                        1.0                   0.6                    1.7
Returns unlikely to involve a qualified appraisal                                      1.1                   0.3                    2.6


All 2006 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              1.5                   0.4                    3.7
Returns likely to involve a qualified appraisal                                        0.6                   0.2                    1.3
Returns unlikely to involve a qualified appraisal                                      4.5                   0.2                   21.3


All 2005 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                              0.7                   0.3                    1.3
Returns likely to involve a qualified appraisal                                        0.5                   0.3                    1.0
Returns unlikely to involve a qualified appraisal                                      0.1                   0.0                    0.9
                                              Source: GAO analysis of IRS data.




                                              Page 43                                         GAO-12-608 Appraised Values on Tax Returns
                                                  Appendix III: Tables on Appraisal Usage and
                                                  IRS Appraisal Enforcement




Table 12: No-Change Rates for Audit That Included Noncash Contributions as an Issue for Taxpayers Reporting Amounts in
Section B of Form 8283 in 2005 through 2008, by Likeliness of Needing a Qualified Appraisal

Percentages
                                                                                                       Lower bound           Upper bound
                                                                                                       of 95 percent         of 95 percent
                                                                                      Estimate   confidence interval   confidence interval
All 2008 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                                 72.2                 20.6                    98.6
Returns likely to involve a qualified appraisal                                           56.2                   0.0                   98.2
Returns unlikely to involve a qualified appraisal                                        100.0                 60.7                  100.0


All 2007 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                                 88.0                 72.0                    96.7
Returns likely to involve a qualified appraisal                                           62.1                 32.1                    86.5
Returns unlikely to involve a qualified appraisal                                         86.2                 59.6                    98.1


All 2006 returns with more than $5,000 in deductions for
noncash contributions carried from Section B of Form 8283                                 37.3                   3.3                   86.4
Returns likely to involve a qualified appraisal                                           56.6                 15.3                    91.7
Returns unlikely to involve a qualified appraisal                                         99.4                 58.7                    99.8


All 2005 returns with more than $5,000 in deductions for
noncash contributions carried from section B of form 8283                                 35.8                 11..5                   67.1
Returns likely to involve a qualified appraisal                                           63.3                 46.7                    77.9
Returns unlikely to involve a qualified appraisal                                        100.0                 65.2                  100.0
                                                  Source: GAO analysis of IRS data.




                                                  Page 44                                         GAO-12-608 Appraised Values on Tax Returns
Appendix IV: Comments from the Internal
              Appendix IV: Comments from the Internal
              Revenue Service



Revenue Service




              Page 45                                   GAO-12-608 Appraised Values on Tax Returns
Appendix IV: Comments from the Internal
Revenue Service




Page 46                                   GAO-12-608 Appraised Values on Tax Returns
Appendix V: GAO Contact and Staff
                  Appendix V: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  James R. White, (202) 512-9110 or whitej@gao.gov
GAO Contact
                  In addition to the contact named above, James Wozny, Assistant
Staff             Director; Anthony Bova; Michael Brostek; Sara Daleski; Eric Gorman;
Acknowledgments   Suzanne Heimbach; Karen O’Conor; Melanie Papasian; Albert Sim;
                  Sabrina Streagle; Karen Villafana; and William Woods made key
                  contributions to this report.




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                  Page 47                             GAO-12-608 Appraised Values on Tax Returns
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