IRC Section 6695A:
New Risks for Appraisers

The Pension Protection Act of 2006 became law this summer.  It is hundreds of pages long.  Buried deep inside is Section 1219, which adds the new Section 6695A to the Internal Revenue Code.  6695A is designed to halt cheating by taxpayers who use inaccurate appraisals (of securities, artwork, vehicles etc.) to avoid paying income taxes, by imposing penalties on appraisers who prepare inaccurate valuations.  But it affects more than just professional valuation firms like SPARDATA -- it affects ANY person or company that supplies values taxpayers use to calculate their income taxes.  6695A may affect financial institutions since customers use their tax forms and year-end statements to prepare tax returns.

6695A imposes a new penalty when “a person prepares an appraisal of the value of property and such person knows, or reasonably should have known, that the appraisal would be used in connection with a return or a claim for refund” AND the appraised value differs from fair market value by more than 50%.  Financial institutions appear to be appraisers under 6695A since they issue forms taxpayers use (such as IRS Form 1099-R) to determine their taxable income and thus income tax payments.  Even year-end statements could be considered appraisals since taxpayers reasonably may be expected to rely on statement values to determine gains, losses etc.

Almost all banks and brokerage firms hold closely-held stocks, partnership interests, real estate mortgages, trust owned life insurance and other ‘sundry assets’.  In SPARDATA’s experience most do not fair market value these assets but instead price them at $1, book value, cost, not available, or some other arbitrary number.  If an institution reports such values (which are not fair market value) on year-end statements or tax forms taxpayers use, it could be violating 6695A and subject to its penalty provisions (including fines of up to $1,000 per mispriced asset).

6695A also tightens up IRC 170 (charitable contributions) by requiring taxpayers donating an asset and claiming a charitable contribution of $5,000 or more to obtain a “qualified appraisal” from a “qualified appraiser”.  A qualified appraiser is “an individual certified by a professional appraiser organization” that “regularly performs appraisals for which he or she is compensated”, and a “qualified appraisal” is one “prepared by a qualified appraiser who can demonstrate verifiable education and experience valuing the type of property appraised” and who is not prohibited from practicing before the IRS.  Financial institutions often rely on customers or the security issuer or a local CPA to establish the gift’s fair market value but generally speaking such persons ARE NOT qualified appraisers and values they provide ARE NOT qualified appraisals.

Suggested Compliance Policy. To avoid liability under 6695A, financial institutions should have sundry asset appraisals whenever there is reason to believe taxpayers may use values reported on their tax forms or their banks tatements to prepare their tax returns (for example, whenever issuing a 1099-R).

There are two ways to obtain appraisals: either have the customer provide them, or else the institution itself can do so. If the customer provides the appraisal, the institution should provide a list of approved appraisers to customers, and establish a deadline (perhaps four months). If a customer has not provided a valuation by the deadline, the institution should get one for the customer. If the institution provides the appraisal, the institution should contract with a competent appraiser to value all affected sundry assets. Either way, the appraisal fee should be charged to the relevant customer accounts.

	1. How many sundry assets does your institution hold (approximately)? 10-99 100-999 1,000+ 2. What types of accounts are they held in? ERISA IRA Trust Other (Specify) 3. How are they being valued now (e.g cost, $1, book value)? 4. How did you hear about SPARDATA?  Contact Information First Name: Last Name: Company: Address: City: State: Zip: Company Website : Phone: Email: I have read, understand and agree to SPARDATA's privacy policy.