The provisions concerning qualified appraisals do not apply to  estate or gift taxes. In  2007, TTCA made the appraiser penalty applicable for appraisals  improperly supporting estate and gift tax returns. Appraiser penalty cases  are audited separately from the taxpayer examination cases in which IRS  may have first noticed improper appraisals. 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 Prominent Role in the Reporting of Estate Taxes Than Gift Taxes or Individuals’ Noncash Charitable Contributions

We estimated that more than 90 percent of estate tax returns filed in 2009  included assets, deductions, or exclusions of more than $50,000 in  categories that IRS officials told us were likely to require the use of an  appraiser. In contrast, less than 20 percent of gift tax returns and less  than 1 percent for individual returns with noncash charitable contributions  were likely to need an appraiser. For estate tax returns, we estimated that  the aggregate value of property needing appraisers was at least $75  billion in 2009. Under current IRS guidance, examiners should refer cases with  appraisals above certain thresholds to Engineering and AAS appraisers  for assistance. Therefore, IRS does not meet the GAO quality review standard with  respect to AAS. 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. 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. 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. 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. IRS agreed with our recommendations. GAO staff who made major contributions to this report  are listed in appendix V.

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. 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. Penalty Thresholds and Valuation Misstatements

For noncash charitable contributions, the Pension Protection Act (PPA) of  2006 lowered the threshold for substantial valuation misstatements from  200 percent of the correct valuation to 150 percent.
Why GAO Did This Study

Misstated appraisals used to support tax returns have long caused concern. In 2006, Congress adopted the Pension Protection Act, which changed the criterion for when appraisals are considered to be substantiallymisstated and created a penalty for improper appraiser practices and qualifications for appraisers with respect to noncash charitable deductions. The Tax Technical Corrections Act of 2007 extended the penalty for misstated appraisals to estate and gift taxes.
Among its objectives, GAO was asked to (1) describe the extent to which individual, estate, and gift tax returns are likely to involve an appraiser and the extent to which IRS audits them; (2) describe how IRS selects returns likely to involve appraisals for compliance examinations, and assess whether the current appraisal threshold is useful; and (3) assess IRS procedures for ensuring that itsappraisal experts are qualified.
To accomplish these objectives, GAO analyzed IRS data, reviewed IRS guidance, and interviewed appropriate IRS officials.

What GAO Found

Appraisers most prominent role relative to the three types of tax returns GAO studied is in the valuation of estates. In the most recent years for which GAO had data, appraisers were likely involved in the valuation of property worth from $75 billion to $167 billion reported on estate tax returns in 2009. In contrast, less than $17 billion worth of gifts in 2009 and less than $10 billion in noncash contributions in 2008 likely involved an appraiser. Gift tax returns that likely used appraisers had higher audit rates than gift returns that were unlikely to have appraisers. The use of appraisers was not associated with higher audit rates for estate tax returns and individual returns with noncash contributions.
The Internal Revenue Services (IRS) procedures for selecting returns to audit do not specifically target noncash contributions or gift or estate tax returns supported by appraisals. Nevertheless, returns with appraisals do get included in the population of audited returns because certain types of returns on which IRS does focus, such as higher-income ones, are also the most likely ones to have noncash charitable contributions that require appraisals. The current appraisal threshold for certain contributions over $5,000 has existed since 1984. The absence of an inflation adjustment over the past 25 years means that many contributors who pay for appraisals would not have needed to do so when the current threshold was first introduced. IRS seldom takes issue with appraisals for noncash contributions. Consequently, there seems to be little risk in Congress raising the $5,000 dollar threshold.
IRS appraisal experts in one division met standards for ensuring that they were qualified. However, art appraisal experts in another division are not subject to either a comprehensive quality review program or continuing education requirements specific to appraising art. The lack of comprehensive quality reviews and mission-specific continuing education requirements could make the art appraisers less effective than they otherwise would be.

What GAO Recommends

GAO recommends that IRS develop a comprehensive quality review program for Art Appraisal Services (AAS) and establish appraisal training requirements specifically for AAS staff. Congress also should consider raising the dollar threshold at which qualified appraisals are required for noncash contributions to reflect inflation. IRS agreed with our recommendations.