I AM GIFTING SHARES TO A PERSON, CHARITY, OR TRUST
A charitable gift of company shares is one of the highest risk taxable events. And with the IRS hiring as many as 80,000 new employees this year, more audits are inevitable. The IRS targets these gifts because they know they are being made by wealthy individuals such as yourself. Bluntly, they know that’s where the money is.
The key to managing the risk involved with a gift is to attach a Qualified Appraisal to the gift return. A “Qualified Appraisal” is defined in Internal Revenue Code Section 170(f)(11) and § 1.170A–16(d)(1)(ii) and (e)(1)(ii) meets the following criteria:
Conforms to Generally Accepted Appraisal Practices: A Qualified Appraisal conforms to the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of the Appraisal Foundation.
Preparation by a Qualified Appraiser: A Qualified Appraisal must be prepared by an appraiser who meets the specific criteria set out by the IRS per Section 170(f)(11)(E)(ii) of the Internal Revenue Code. These criteria include, among others:
Professional Qualifications:
Holds an appraisal designation such as the CVA or ASA from a recognized professional appraiser organization, or
Meets certain alternative education and experience requirements.Appraisal Practice:
Regularly conducts appraisals for compensation.Demonstration of Competence:
Shows verifiable education and experience in valuing the type of property being appraised.Compliance with Regulations:
Has not been prohibited from practicing before the IRS under § 330(c) of Title 31 of the United States Code within the 3-year period ending on the date of the appraisal.
Adherence to Generally Accepted Appraisal Standards: The appraisal must comply with the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP), as developed by the Appraisal Standards Board of the Appraisal Foundation.
Detailed Content Requirements: The Qualified Appraisal must include specific information about the contributed property:
A detailed description that allows someone unfamiliar with the type of property to ascertain that the appraised property is indeed the contributed property.
The valuation effective date, which is crucial in determining the value of the property at the time of contribution.
The fair market value of the contributed property as of the valuation effective date, in accordance with IRS code section 1.170A–1(c)(2).
Descriptions of the valuation methodologies applied and the basis for doing so.
Signed statements of independence by the appraiser and that the appraiser has not been barred from practicing before the Internal Revenue Service.
These elements ensure that the appraisal is comprehensive, reliable, and in line with professional appraisal standards, thereby providing an accurate valuation of the property for tax purposes.
Timeliness: A Qualified Appraisal must be signed and dated by the Qualified Appraiser no earlier than 60 days prior to the date of the contribution or gift and no later than the due date of the return on which the deduction for the contribution is first claimed. Also, The qualified appraisal must be received by the donor before the due date, including extensions, of the return on which a deduction is first claimed, or reported in the case of a donor that is a partnership or S corporation, under section 170 with respect to the donated property, or, in the case of a deduction first claimed, or reported, on an amended return, the date on which the return is filed.
Fee Independent: The fees to perform the Qualified Appraisal may not, in any way, be dependent upon the conclusion of appraised value.
Many gift appraisals do not meet the above criteria and are most likely to be identified by the IRS for audit. Accordingly, the best risk management practice you can adopt to minimize your risk or a battle with the IRS regarding your gift is to retain a Qualified Appraiser to perform a Qualified Appraisal. If you’re making a gift and you’re interested in managing your IRS audit risk, contact High Score Strategies for a consultation.
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