Estate Tax, Gift Tax, and Income Tax Returns

In June 2012 the GAO released a report  - GAO-12-608 (PDF) - analzying taxpayers' use of appraisals on estate tax, gift tax, and income tax returns, and compared the frequency with which appraisals were used with the frequency of examinations or audits reviewing the appraisals. Data was drawn primarily from the 2009 filing year. Perhaps not surprisingly, the highest frequency of appraisal use and review was with estate tax returns. On the other hand, only a low percentage of gift tax returns used appraisals. The audit rate for gift tax returns with appraisals was higher than the audit rate for gift tax returns without appraisals, but there was no difference in audit rates for estate tax or income tax returns (non-cash charitable contributions) with or without appraisals.

The GAO summary comments from the report are reproduced below.

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 substantially misstated 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 its appraisal experts are qualified. To accomplish these objectives, GAO analyzed IRS data, reviewed IRS guidance, and interviewed appropriate IRS officials. 

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.