Navigating an IRS Gift/Estate Appraisal Challenge
IRS Gift or Appraisal Challenge? Fight Back & Minimize the Tax Consequences
An IRS challenge to your gift or estate tax appraisal can be a daunting prospect. The potential consequences, including increased tax liability and penalties, can cause significant financial strain. But you can fight back and protect your assets while navigating an IRS appraisal challenge, empowering you to effectively respond and potentially minimize any tax impact.
Increased Scrutiny
The IRS is expanding its workforce, potentially leading to more tax return examinations. This includes scrutinizing estate and gift tax returns, particularly those with appraisals justifying the value of assets.
Why the Challenge?
There are two main reasons the IRS might contest your appraisal:
- Material Deficiency: Your return might have a significant error related to the appraised value.
- Random Selection: Your return may have been chosen for review at random.
The Impact of a Lost Challenge
If the IRS successfully disputes your appraisal, they will adjust the value of the asset. This could result in increased tax liability, penalties and interest, and reduced lifetime exemption.
An IRS challenge doesn’t have to be a nightmare. By following these steps, you can increase your chances of a successful outcome.
How to Fight Back
1. Use a professional to set up your gift / estate planning
It’s a smart move to have your gift and estate planning prepare by a professional. Estate and gift tax laws are complex and can change frequently, and a professional can help you develop strategies to minimize your estate’s tax burden. For more information, watch this video on Estate Planning Basics.
2. Understand the Challenge
Gather Information: Request a copy of the IRS’s appraisal and the Notice of Challenge explaining their concerns.
Analyze the Discrepancy: Compare the original appraisal with the IRS’s appraisal. Identify the specific points of disagreement (e.g., comparable sales data, valuation methodology).
Consult Your Appraiser: Discuss the IRS’s concerns with your original appraiser. They might be able to clarify discrepancies or provide additional supporting documentation.
3. Seek Legal Counsel
Seek an Experienced Attorney: Look for a lawyer specializing in tax law, particularly with experience in gift and estate tax matters.
Benefits of Legal Expertise: Your attorney can:
- Navigate the Legal Process: They understand complex tax regulations and can guide you through the challenge procedures.
- Communicate with the IRS: They can handle all communication with the IRS on your behalf, ensuring proper documentation and adherence to deadlines.
- Develop a Defense Strategy: Based on the details of your case, they’ll craft a strong defense strategy to address the IRS’s concerns.
- Negotiate a Settlement: In many cases, your attorney can negotiate a settlement with the IRS, potentially minimizing tax liability and penalties.
4. Consider a Second Appraisal
Hire a qualified appraiser with expertise in valuing the specific asset type in question (e.g., real estate, art, business interests).
Benefits of a Second Appraisal
- Independent Review: The new appraiser can provide an objective review of both the original and IRS appraisals.
- Strengthening Your Case: Their analysis might identify errors in the IRS appraisal or support the original valuation with additional evidence.
- Tax Court Expertise: If your case goes to Tax Court, an appraiser experienced in these proceedings can effectively present their findings as expert testimony.
5. Acknowledge the IRS’s Expertise
The IRS has extensive resources and valuation experience. It’s crucial to recognize their expertise. Gather all documentation supporting the original appraisal and your interpretation of the asset’s value. And collaborate with your attorney to present a clear, well-supported case, addressing the IRS’s concerns directly and professionally.
By following these steps, you can increase your chances of a successful outcome and minimize the impact of the IRS challenge. Remember, the earlier you seek legal and professional guidance, the stronger your position will be.
Questions?
Estate, Trust, and Succession Planning Services
Mark’s background in tax enables him to provide extensive services to the firm’s clients in the areas of estate and retirement planning, and business succession consulting.