Question

Singh, a qualified appraiser of fine art and other collectibles, was advising Colleen when she was determining the amount of the charitable contribution deduction for a gift of a sculpture to a museum. Singh sanctioned a $900,000 appraisal, even though he knew that the market value of the piece was only $300,000. Colleen assured Singh that she had never been audited by the IRS and that the risk of the government questioning his appraisal was negligible. But Colleen was wrong, and her return was audited. The IRS used its own appraisers to set the value of the sculpture at $400,000. Colleen is in the 32% Federal income tax bracket. Singh's fee for preparing the appraisal was $20,000.

a. Determine the penalty that the IRS can assess against Singh. (Do not consider the valuation penalty as to Colleen's return.) $

b. What is the penalty if Singh's appraisal fee was $7,500 (not $20,000)? $

Answer 1

According to the IRS if an appraiser is found guilty then he can be penalized against IRC 6695A.

The amount of penalty is calculated as mentioned below:

Penalty calculated as the lesser of: a and b

(a) 125% of the appraisal fee

(b) or the greater of

(i) 10% of the tax underpayment or

(ii) $1,000.

According to this the penalty that the IRS can assess lesser of the following: (a) 125% of the appraisal fee =125% of $20000= $25000

(b) Greater of

i) 10% of the tax underpayment= 10% of (30% of (900000-400000))=$15000; or

ii) $1000

So the IRS can impose a penalty of $15000 to Singh.

If the Singh’s appraiser fee was $7500 then the penalty would be lesser: of the following

(a) 125% of the appraisal fee =125% of $7500= $9375

(b) Greater of

i) 10% of the tax underpayment= 10% of (30% of (900000-400000)) = $15000; or

ii) $1000

So the IRS can impose a penalty of $9375 to Singh