The burden of supporting the value of the business or business interest is the taxpayer’s responsibility if the IRS audits the gift or challenges the value for any reason. Absent a quality valuation from a qualified appraiser, the taxpayer has limited basis to dispute what may be an unrealistic IRS valuation position. If a qualified appraisal has not been completed before filing, the taxpayer will have to pay for such a valuation when the valuation dispute arises a well-reasoned valuation from a qualified appraiser can sometimes prevent a valuation challenge.

Flashback: In a 2007 Second Circuit Court decision for Thompson v. Commissioner, the Court held that the decedent’s minority interest in a family business was significantly undervalued (the estate claimed the value of interest was $1.75 million; the Court said that the value of the interest was $13.5 million); and in rendering its opinion reprimanded the executors of the estate because they chose to obtain an appraisal from an attorney and an accountant, neither of whom had experience in valuing interests in family businesses. This highlights the importance of having a qualified appraisal performed by an independent valuation professional.

If the IRS challenges the value reported on an estate or gift tax return, and determines that the value was underestimated, a larger tax can be assessed on the value as well as an underpayment penalty the total tax owed can be assessed if the value claimed on the return is 50 percent or less of the correct value of the asset. The costs of added taxes and penalties are likely to be much higher than the cost of obtaining a qualified appraisal