IRS Rules There is No Statute of Limitations on Appraiser Penalty

In Chief Counsel generic legal advice (EMISC 2007-0017), the IRS has concluded that it may assess a Code Sec. 6695A penalty against an appraiser for appraisals prepared after May 25, 2007 that are used in connection with an estate or gift tax return or claim for refund or credit that results in a gross valuation misstatement. In addition, the IRS concluded that there is no period of limitations that applies to the assessment of a Code Sec. 6695A penalty.

Background

Under existing rules, if the claimed value of property based on an appraisal results in a substantial or gross valuation misstatement under Code Sec. 6662, a penalty is imposed under Code Sec. 6695A on any person who prepared the appraisal and who knew, or reasonably should have known, the appraisal would be used in connection with a return or claim for refund.

The penalty is the greater of $1,000 or 10% of the amount of the underpayment attributable to the misstatement (but in no event more than 125% of the gross income received by the appraiser for preparing the appraisal). The penalty doesn't apply if the appraiser establishes that the appraised value was more likely than not the proper value.

The 2007 Small Business Act extended the income tax return preparer penalties to all tax return preparers. In so doing, it amended Code Sec. 6696(e) to provide, effective for returns prepared after May 25, 2007, that, for purposes of Code Sec. 6694 , Code Sec. 6695 , and Code Sec. 6695A , “return” means any return of any tax imposed by subtitle A, and “claim for refund” means a claim for refund of, or credit against, any tax imposed by subtitle A.

Code Sec. 6695A generally is effective for appraisals prepared with respect to returns or submissions filed after August 17, 2006.

Applicability of Code Sec. 6695A to estate and gift tax cases

The generic legal advice noted that Code Sec. 6695A(a)'s statutory language includes penalties for returns or claims for refund based on appraisals that result in gross valuation misstatements under Code Sec. 6662(h) , which defines gross valuation misstatement to include certain estate and gift tax valuation understatements. Before amendment by the 2007 Small Business Act, however, the PPA had amended Code Sec. 6696(e) to define “return” and “claim for refund” for purposes of Code Sec. 6694, Code Sec. 6695, and Code Sec. 6695A, to include only tax imposed by subtitle A, i.e., income taxes. The plain reading of former Code Sec. 6696(e) meant that the Code Sec. 6665A penalty was imposed only for appraisals relating to returns or claims for refund of income taxes. The express language of former Code Sec. 6696(e), therefore, did not give IRS the authority to assess the Code Sec. 6695A penalty with respect to estate and gift tax appraisals prepared before May 25, 2007, the effective date of the amendments to Code Sec. 6696(e) made by the 2007 Small Business Act .

The language of Code Sec. 6696(e), as revised by the 2007 Small Business Act amendments, changed the definitions of “return” and “claim for refund” for Code Sec. 6695A purposes to include returns and refund claims for any tax imposed by the Code. As a result, under current law, the Code Sec. 6695A penalty applies to an appraiser who prepares an appraisal used in connection with an estate or gift tax return or claim for refund or credit that results in a gross valuation misstatement. This change is effective for returns prepared after May 25, 2007. The preparation of an appraisal to be used with a return which results in a gross valuation misstatement can be considered part of the preparation of the return itself. Thus, the generic legal advice says that IRS should assess a Code Sec. 6695A penalty against an appraiser only for appraisals prepared after May 25, 2007.

Period of limitations on assessment

The generic legal advice says that there is no period of limitations applicable to the assessment of a penalty under Code Sec. 6695A . Code Sec. 6696(d)(1) specifically provides a three-year period of limitations on assessment of the Code Sec. 6694(a) and Code Sec. 6695 penalties, but does not provide for a limitations period for the Code Sec. 6695A penalty. Code Sec. 6696(d)(2) specifically provides a three-year period of limitations on a claim for refund of an overpayment of any penalty assessed under Code Sec. 6694, Code Sec. 6695, or Code Sec. 6695A . The general period of limitations under Code Sec. 6501(a), which provides that tax must be assessed within three years after the return was filed, does not apply to the Code Sec. 6695A penalty. Code Sec. 6501 explicitly provides that the term “return” means the return required to be filed by the taxpayer. Because an appraiser is not required to file the return giving rise to the penalty, Code Sec. 6501(a) does not apply.

Accordingly, the general legal advice concludes that there is no period of limitations that applies to the assessment of a penalty under Code Sec. 6695A . It may be assessed at any time. The generic legal advice did note however, that, to the extent practicable, IRS should assess the penalty within three years after the filing of the return or claim for refund on which the penalty is based in order to minimize the ability of an appraiser to argue that the assessment was not made on a timely basis.

Trackbacks (0) Links to blogs that reference this article Trackback URL
http://taxlaw.sprouselaw.com/admin/trackback/54943
Comments (0) Read through and enter the discussion with the form at the end
Post A Comment / Question Use this form to add a comment to this entry.







Remember personal info?
Send To A Friend Use this form to send this entry to a friend via email.