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The IRS reviews charitable contribution valuations to ensure that taxpayers are claiming appropriate deductions for noncash gifts to qualified organizations. The process is governed by a combination of statutory requirements, Treasury Regulations, and IRS procedures, all designed to ensure that the fair market value (FMV) of donated property is accurately determined and properly substantiated. Here’s a detailed overview of how the IRS approaches this review:
The IRS requires that the value of donated property be determined as its FMV at the time of the contribution. FMV is defined as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.
A “qualified appraisal” must be prepared by a “qualified appraiser” in accordance with generally accepted appraisal standards, specifically the Uniform Standards of Professional Appraisal Practice (USPAP). The appraisal must include detailed information about the property, the method of valuation, the appraiser’s qualifications, and a signed declaration regarding penalties for misstatement.
An IRS qualified appraiser is an individual with verifiable education and experience in valuing the type of property being appraised. The appraiser must not be the donor, the donee, or a party to the transaction in which the donor acquired the property (with limited exceptions), and must not receive a prohibited appraisal fee (such as a fee based on a percentage of the appraised value).
When a return is filed with a claimed deduction for a noncash charitable contribution, the IRS may:
The IRS scrutinizes whether the taxpayer has met all substantiation requirements, including obtaining a contemporaneous written acknowledgment from the donee for gifts of $250 or more, and whether the appraisal meets all technical requirements. If the IRS finds that the value or basis of the property was overstated by 150% or more, and the underpayment of tax exceeds $5,000, a 20% penalty may apply; if overstated by 200% or more, the penalty increases to 40%.
Even if a taxpayer submits a qualified appraisal, the IRS is not required to accept the appraised value. The IRS may conduct its own valuation, often using its own appraisers or panels, especially for unique or high-value items. The IRS will consider all relevant factors, such as cost, comparable sales, replacement cost, and expert opinions, but will give more weight to appraisals that are thorough, well-supported, and prepared by knowledgeable professionals.
For art valued at $20,000 or more, the taxpayer must attach a complete copy of the signed appraisal to the return. For art appraised at $50,000 or more, the taxpayer can request a Statement of Value from the IRS before filing the return, which can be relied upon for reporting purposes.
The IRS provides detailed guidance on charitable contribution valuations in:
These publications outline the irs charitable contribution rules, irs appraisal requirements, and the standards for a qualified appraiser.
The IRS reviews charitable contribution valuations by requiring detailed substantiation, including qualified appraisals for significant noncash gifts, and by reserving the right to challenge or adjust claimed values. Taxpayers must follow strict documentation and appraisal standards to support their deductions, and the IRS may impose penalties for overstatements. For high-value or unique items, the IRS may use specialized panels or issue Statements of Value to ensure accuracy and compliance. Bennett Thrasher’s experienced tax professionals can help ensure your charitable contributions are properly documented and fully compliant with IRS standards. Contact us today.
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