Testimony of Howard A. Lewis, Executive Director, Institute of Business Appraisers at the IRS Panel Discussion

Testimony of Howard A. Lewis, Executive Director, Institute of Business Appraisers at the IRS Panel Discussion
Internal Revenue Code 6695A
Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals

New Carrolton, MD

February 18, 2010

My name is Howard A. Lewis. I’m the Executive Director of the Institute of Business Appraisers, located in Plantation, Florida. I’m also the former National Program Manager of the IRS Engineering and Valuation Program. I held that position from June 2000 to August 2008, when I retired from the Service. The Institute of Business Appraisers, or, the “IBA,” is the nation’s first and oldest appraisal membership association. Mr. Raymond Miles, who continues to serve as a consultant, founded IBA in 1978. The IBA is the only association specializing in business appraisal. It’s nearly 2,000 members come from all parts of the United States and many foreign countries, and typically hold accreditations from IBA and or one or more of the other appraisal organizations, including those represented here today.

While at the Internal Revenue Service, I was the first to identify the problem with the Circular 230 regulations linking Code section 6701 to the professional responsibility rules governing appraiser practice. I strongly advocated for breaking that link and such was accomplished in the Pension Protection Act of 2006. The purpose was to enable more effective administration of the professional responsibility rules affecting appraisers and the intended result was accomplished with the enactment of section 6695A and subsequent announcements by the Internal Revenue Service.  However, some important issues regarding administration of that section have arisen and I am pleased to discuss some of these with you today, representing the members of the Institute of Business Appraisers.

The IBA, and I am certain we are joined by our colleagues here today representing other professional associations, strongly supports the efforts of the Internal Revenue Service to improve and enhance it’s oversight and administration of appraisers of all disciplines, including business appraisers. The IBA appreciates this opportunity to address several issues of importance as the Service continues to develop its approaches and procedures involving penalties under section 6695A.

I’d like to focus this afternoon on three areas I believe are important to the Service and the professional appraisal community. First, I’d like to discuss the importance of appraisal credentials, both in the private and public sector and make a recommendation that would improve the Service’s ability to administer section 6695A. Second, I will point out a few elements of the Service’s current penalty implementation procedures, reflected in the Commissioner’s memorandum of August 18, 2009 and in the statute itself that IBA believes may be improved to better serve both the interests of appraisers and of federal tax administration. Third, I’d like to share with you a few recommendations from the field, having spoken to and heard from a representative sample of members of the IBA, who have spent decades in the profession and have a lot of experience with tax examinations involving appraisal issues. Finally, if time permits, I will make a brief comment on my perspective as a former national program manager, now serving as the leader of the nation’s pioneer business appraisal membership association.

First, my advice. To better understand my recommendation, it is important to reflect on the context of the penalties under section 6695A from the perspective of who can assert the penalty. IRS notes, in the referenced memorandum of August 2009, Revenue Agents, E & G Attorneys and Tax Compliance Officers have responsibility for asserting IRC section 6695A penalties. Examiners are encouraged to submit referrals to LMSB’s Field Specialists Engineers for assistance or consultation. Depending on the facts and circumstances of the related tax case, additional Engineer support may be warranted to fully develop the penalty case particularly if the Engineers were not involved during the related tax examination. Clearly, the procedure allows IRS staff who are not certified appraisers, and even who are not appraisers at all, to assert a penalty under section 6695A. At the same time that the Service has aggressively and, I add, smartly, elevated the appraiser qualifications and appraisal standards for certain tax-related appraisals, the Service has failed to upgrade its own appraisal staff’s credentials to ensure equity and fairness in administering over this section. I am fully aware that the Service strives to hire only certified appraisers. I implemented that change during my leadership of the program. No argument there. However, there remains no requirement or incentive, other than a personal one, for IRS appraisal staff to maintain and or improve their credentials once on board. Further, we all know the workload is enormous and resources are limited. Thus, IRS has no choice but to assign valuation issues to non-certified staff and even to non-appraisal staff. Management does this carefully and with the utmost regard for customer service. I know that personally. However, penalty administration must be dealt with separately and differently. Penalties involve not only monetary amounts but also the real risk of suspension from practice, which could well mean the end of a professional’s career. The appraiser and his or her family has a lot at stake and the Service must ensure that only the most qualified staff are authorized to investigate, evaluate, and assert penalties under section 6695A, even if that means creating a special team, hiring more staff, or foregoing penalty examinations if properly credentialed staff are not available. IBA and its affiliates, would be pleased to assist the IRS with training, continuing education and a fast-track accreditation process, to help accomplish these goals.

Second, as to another element of the August memorandum and the statute itself. It is no surprise to anyone in this room that the “more likely than not” exception to the 6695A penalty has caused, and understandably and appropriately so, a great deal of confusion and concern among tax and appraisal professionals. With rare exceptions, it may be extremely difficult for an appraiser to demonstrate that his or her opinion falls within the boundaries of this exception. Most IRS staff would agree, and I have no doubt that, an appraiser would rarely make an adjustment to a value claimed by a taxpayer if the IRS appraiser believed the taxpayer’s appraiser was more likely than not correct as to their opinion of value. Surely a criminal or other sensitive investigation may provide an exception but, normally, if I believed the taxpayer’s appraiser was more likely than not correct, I wouldn’t propose an adjustment in the first place. Without an adjustment, there’s obviously no 6695A penalty. Long term, I believe statutory change may be necessary. Short term, I believe the Internal Revenue Service should consider developing a standard by which, for the purpose of asserting the penalty, the appraiser’s opinion would be judged under the more likely than not exception. The standard would, in my opinion, include an analysis of the compliance by the appraiser with generally accepted appraisal standards, whether the appraiser’s work was reviewed by a qualified third party, such as one holding the appraisal review designation from the Institute of Business Appraisers or its equivalent, whether the appraiser had sufficient experience in appraising the particular type of property under consideration, and similar objective standards of professional appraisal practice. Another element of the penalty administration process I would like to comment on involves the not atypical situation of a taxpayer who, for any number of reasons, including strategic, nuisance value, or otherwise, decides to agree to an appraisal adjustment in exchange for the Service’s concession of one or several unrelated issues. Having over 32 years of experience in the field as an IRS valuation engineer and as a management team member from first level through national program manager, I assure you that this common, every day process will result in inadvertent and apparent valuation misstatements unless recognized and dealt with. A compromised value is not necessarily the correct value and appraisers must be assured that their professional opinions will not be misinterpreted due to a decision made by their client that has nothing to do with value.

Third, some interesting and relevant field observations. Several members suggested the creation of an appraisal review board, perhaps similar to the Commissioner’s Art Advisory Panel. This board could be formed with representatives of the major membership associations, together with certified IRS appraisers. The board could serve as an independent group to assist the IRS in evaluating penalty applications. Many members suggested the development and use of a checklist, similar to the one I described earlier. The checklist could assist the Service in determining the credibility of appraisal reports in instances where the more likely than not exception should apply. Another group of members suggested that the Service compile, redact and summarize actions taken involving assertion of 6695A penalties against appraisers, pointing out the salient facts and circumstances and trends, if any, identified by the IRS in its penalty administration process. I think these suggestions are very good ones and IBA hopes the IRS will consider them.

Finally, a personal note. After 32-1/2 productive, enjoyable and successful years at the IRS, I’ve spent the last year and a half working with some of the finest appraisers and leaders in our profession. One observation rings home again and again. The vast majority of appraisers in our profession are competent, knowledgeable, ethical and truly focused on performing their work on the highest quality basis. They strive for excellence, resent incompetence and are continually looking for ways to become better at their jobs and to help others improve their skills as well.

It is an honor to be here today to speak with you.