Tax season in the United States is now over, but for collectors the problems it poses are perennial. Collectors who donate valuable works to museums face the challenge of putting a specific price on those objects to claim a charitable deduction on their tax returns. And the heirs of collectors with works of art in their estates face a similar problem of determining value.
The process of appraising the value of a work can be a high-wire act, as the Internal Revenue Service (IRS) may decide that the appraisal is too high or too low, which could impose a tax on the taxpayer. extra to pay and possible penalties.
However, the IRS offers assistance to taxpayers through the ability to receive a pre-assessment from the agency’s art appraisal services, known as a statement of value. This assistance costs $7,500 for one to three items and $400 for each additional item. The minority of items flagged as problematic are sent to the IRS Art Advisory Panel, a group of about 25 dealers, scholars, curators and scholars who appraise works worth $50,000 or more.
Judging by the panel’s annual reports, the likelihood of taxpayers receiving a bill from the federal agency is relatively high. In the latest review for fiscal year 2021, for example, only 35% of the reviews received were accepted, while 26% were deemed too high (for items donated to charity) and 39% were deemed too low. (for objects in estates). Taking all 112 object appraisals assessed by the panel, a total of $16,806,838 in erroneous appraisal values were found.
Beware of penalties for incorrect assessments
The quality of art and antique appraisals submitted with tax returns has at times been a matter of concern to the IRS and prompted congressional action. In 2006, penalties for what are described as “gross valuation errors” were enacted in the Pension Protection Act.
Under this law, taxpayers would be assessed 30% of the tax underpayment if the appraised value of the item is deemed by the IRS to be misaligned by 150% or more. This is in addition to paying adjusted tax and interest on that amount. There may be no additional tax payment if the underpayment is less than $1,000 or if the assessment was made “in good faith”.
Disagreements over object appraisals are not solely the result of professional misconduct on the part of an appraiser or greed on the part of the taxpayer. The IRS has long maintained that objects have only one price, while appraisers have argued that the price an object might fetch if offered for sale may differ greatly from what it might cost if a buyer was looking to buy it. Viewers of the PBS program Antiques Tour (the American version of the popular BBC program) know that two different valuations are often given for the same item: one for the auction estimate and another for the insurance price.
Alice Duncan, senior director of the Gerald Peters Gallery in New York and a member of the Art Advisory Panel, explains that appraisers contact her periodically to ask her “what triggers our review and what to avoid, rather than details about the value “. Instead of a straight answer, she tells them what “professional appraisers should submit: good photographs, qualified and knowledgeable condition reports (especially if the condition is factored into their appraisal), and a sensible discussion. of their value decision. Research evidence, such as a catalog raisonné number, are also good indicators of the quality of the report and the reviewer.
Obtaining a pre-appraisal from the IRS eliminates the risk of being found liable for undervalued or overvalued artwork. Ralph Lerner, a New York attorney, says he’s advised estate clients to seek declaration of value rulings from Art Appraisal Services because “it helps administer the estate so you can distribute the assets.” . Regardless of an item’s value determined by the appraisal service, “the IRS is bound by that value, so I might take pieces from the estate, put them up for auction, and if [they] sold for more than IRS ruling values, I will only have to pay capital gains tax on the increase, not 40% estate tax on increasing value,” says Lerner.
However, he adds, “the IRS may deny or delay issuing the advance ruling for estate tax purposes because the IRS may ask the executor if they intend to sell the work of art shortly after the issuance of the decision”. The reason, he says, is that the best measure of a work of art’s value is the price at which it is sold, especially if the sale takes place shortly after appraisal. So the IRS doesn’t want to be embarrassed by making a ruling valuing an artwork at $10 million – which binds the IRS – which then sells nine months later for $15 million.
