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This article examines the impact on taxpayers and appraisers as well as their advisors of the new Federal provisions of the Pension Protection Act. For appraisers performing valuations for federal tax purposes in accordance with the Pension Protection Act (PPA), signed into law in August 2006, stipulates new penalties and stiff sanctions if the appraisers or appraisals fail to meet the new qualifications.

The Backdrop

The Congress and IRS, to safeguard the U.S. tax system and force taxpayers to straighten up, have introduced new rules and restrictions that impact lawyers and accountants as well as taxpayers. The Pension Protection Act (PPA) of 2006 establishes severe penalties for unethical conduct on the part of accountants involved in federal tax information consultancy to private firms.

Previously, the government’s targets for tax abuse were various corporate transactions. But now it has trained its guns on the venerable charitable contribution deduction as well. The act attempts to prevent overvaluing the property given to charity to take advantage of the fair market value deduction. According to Section 170(f)(16)(B), Congress has invited the IRS to stop the deduction completely. In the middle of the gun battle are the appraisers who opine for the taxpayers about the values of property that they give to charity.

Qualified appraisers
PPA also requires that appraisals need to be prepared by qualified appraisers.1 A qualified appraiser is defined in the Act to mean a person who has earned an appraisal designation from a recognized professional organization or has met minimum education and experience requirements established by the Treasury Secretary through regulations. An appraiser will not be treated as a qualified appraiser unless the appraiser demonstrates verifiable education and experience for valuing the type of property subject to the appraisal. Also, the appraiser must not have been prohibited from practicing before the IRS at any time during a three-year period prior to the date of the appraisal.

To sum it up, it is now required that an appraiser valuing property for charitable deduction must be trained and experienced and a vague representation by the appraiser will no longer suffice.

Appraisal Impact on Charitable Contributions
PPA has led to an increase in mandatory requirements for appraisals and appraisers to meet Internal Revenue Code Section 170, which covers charitable requirements.

It is now required that all claimed deductions in excess of $5,000 must be accompanied by a “qualified appraisal.” The regulations have duly defined the terms “qualified appraisal” and “qualified appraiser.”

All appraisals to qualify must fully comply with Uniform Standards of Professional Appraisal Practice (USPAP). Those that do not fully comply but are “consistent with the substance and principles of USPAP also satisfy this requirement.

Qualified Appraiser:

According to the Act for a person to be a “qualified appraiser” must meet 5 requirements as laid down in the code. According to these requirements, an appraiser must:

1. Have earned an appraisal designation from a recognized professional appraiser organization
2. Demonstrate “verifiable education and experience” in valuing the type of property subject to the appraisal
3. Regularly performs appraisals for compensation
4. Not appear on the IRS’s disqualification list at anytime during the three years prior to the date of appraisal
5. Meet other requirements [to be] prescribed by Secretary

However there is an exception available to taxpayers when the appraiser fails to meet the Act’s rigorous requirements. The denial of the deduction is inapplicable “if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect.”

Further, Notice 2006-96 states that the designation must be “awarded on the basis of demonstrated competency in valuing the type of property for which the appraisal is performed.” Additionally, the Notice notes that alternative education and experience requirements are met if the appraiser has done each of the following:

1. Successfully completed college or professional level course work that is relevant to the property being valued.
2. Gained at least two years experience in the trade or business of buying, selling or valuing the type of property being valued.
3. Fully described his or her relevant education and experience in the appraisal.

Prevention is better than cure. By adhering to norms and being organized and cautious about the whole process would ensure that you have nothing to fear. Educating yourself about the new law and its implications will further minimize your chances of getting in the way of PPA radar and getting penalized heavily.

Mel Abraham CPA, CVA, ABV, ASA, CSP - author & Adjunct Professor (USD Law School. Further, for access to an audio presentation on IRS penalties and the Pension Protection Act visit http://www.valuationeducation.com/penalties.html. He can be reached at mel@melabraham.com.

Taxation is a very important aspect of the functioning of civilized society. In that sense, the IRS performs a very significant duty. However, not every taxpayer is perfect in paying their taxes. There are several faults that occur - accidentally, intentionally or out of ignorance - when people file their returns. When this happens, the IRS has no other option but to impose penalties on errant taxpayers. It is important for taxpayers to know about these IRS penalties, because some of them can be quite stiff and really burn a big hole in their pockets.

Here are some of the most popular reasons why taxpayers end up paying penalties to the IRS.

-Late Filing of Returns - Most taxpayers have to pay fines for filing in their returns late. There is always a fixed date for filing of returns, and it is mandatory to file within that date. Even a delay of one day after that would attract the IRS penalty for late filing. Depending on how late your filing has been done, you might end up paying 5 to 25% of the total amount as a penalty for interest.

-Late Tax Payment - Some taxpayers defer on paying the taxes even after they have filed their returns. Paying the dues late also attracts penalties. The penalties here are not that high - you will have to pay 0.5 to 1% of the total tax amount as interest. But it is a penalty that can be easily avoided by making payments on time.

-Underpaying - IRS has laid down specific rules to show incomes and to calculate taxes on that. If you do not adhere to those guidelines and pay lower than the total amount due to you, then there will be penalties to pay if the underpayment is discovered. IRS has good enough means to find out underpaying, and in its viewpoint, this is an inexcusable offence. Penalties are quite high. You might end up paying 20% interest.

-Over-evaluating Taxes - Even over-evaluating the taxable amounts can attract a heavy penalty. You might have to pay as much as 20 to 40% percent in interest depending on the amount you have over-evaluated. That is why it is necessary to show the right amount of earnings within the accounting year.

-Hiding Property and Gift Taxes - IRS has its own means of finding out about the amounts of gifts you have been given in the whole year, and the gifts you have given to other people too. If you have received a gift (especially monetary gifts), then you have to show that when filing returns and pay the due taxes on it. Similarly, you have to pay due taxes on whatever properties you might have. Hiding these amounts could mean penalties of about 20 to 40%.

-Fraud and Deception - Fraud is an unpardonable excuse in the eyes of the IRS. Any kind of deception in filing returns, if exposed, can lead to a penalty of as much as 75%. Of course, cases of fraud can be argued against, but in this respect, the resources of the IRS are much too firmly in place.

These are some of the main IRS penalties that are levied most commonly. If you observe, you will understand that most of them are due to faults in filing returns and in making the actual payments of taxes. That is why, it is better to take the help of a qualified accountant to file your returns rather than handling the process yourself. This will also take some burden off your shoulders.

For more information and advise on avoiding IRS Tax Penalties, please feel free to visit

http://www.irspenaltieshelp.com

Recently hailed as the number one career for the year 2007, Internal Auditors are very well sought after and compensated accordingly. Because of stricter laws and enforcements due to corporate accounting scandals, like that of Enron, companies are offering top dollar compensation to accounting and finance professionals to provide internal audits. As an internal audit can be expensive, it is wise to allocate and ensure the availability of funds prior to hiring an internal auditor.

As most companies typically conduct annual or bi-annual reviews of processes and procedures, in order to remain compliant, and hire internal auditors to do so, there are times when a government agency will come to audit things themselves. These are stressful times and choosing the right Internal Auditor can save thousands in fine and penalties.

There are several factors that should be determined before choosing an Internal Auditor. First, you must know the role of an Internal Auditor to be able to match your compliance strategy with the proper education, experience and know-how to effectively get the job done. Acting as a go-between for government compliance offices and providing a service to your company, the internal auditor must be aware of the latest in compliance governance. Therefore, when you choose an internal auditor, it is your job, that is, you’re responsible for the auditor you choose, to make sure the credentials are relentlessly checked. Including the human resource department, the chief financial officer(s) as well as others who make high-level decisions for the company are good ideas, too.

In order to enhance internal controls and to remain compliant with government standards, experience has to be the number one criteria when choosing someone who will have access to all intellectual and physical property records as well as delicate financial information. When choosing an Internal Auditor, you should check references, licensing information, and review previous audit information available. The Institute of Internal Auditors is a professional organization aimed at providing guidance, certification and educational research to it’s over 130,000 members. This organization serves as a clearinghouse for checking licensing and references.

Secondly, keeping in mind your companies business needs, the internal auditor should specialize in the type of auditing you require. For example, if it is quality management auditing, then the internal auditor should have the capability to grasp and understand fully your company’s business, quality controls and standard operating procedures. This should be proven by a consistent track record of QMS audits. If it is risk management or financial analysis that is required, then, along with being bonded individually as well as within his/her own auditing company, the internal auditor must be completely impartial and objective. This ensures that, while no personal interest is involved, the end result will be to make recommendations, share downfalls and places where compliance must be tightened to ensure your organization will pass any type of auditing test.

As reported by NASDAQ, only half of all companies listed on the exchange actually have in place internal auditor functions. This is a dangerous lack of practice and could cost so much in fines and penalties, that an internal audit can look like the cost for a weekend drive to your mother’s house. Sarbanes-Oxley requires the Internal Audit function exists in companies that have $250,000 in assets or more. It would be a horrible thing if a Cynthia Cooper wanna-be blew your company apart simply because you didn’t hire an Internal Auditor.

Kevin Dark’s new website will tell you more about internal audit and SOX compliance.

The IRS recently threw down the gauntlet and placed pressure on private companies to get their valuations right at no matter what stage of development they are. The Service has backed up this gesture by exposing private companies to substantial tax liabilities and penalties if they do not.

Since the enactment of Section 409(A), non-public companies have struggled with how they should establish that the exercise price of a stock option or a stock appreciation right (SAR) was determined reasonably to be fair market value. Up to this point, most private companies did not worry about valuing their stock very often, if at all. Private company valuations were needed usually for an imminent transaction, for an ESOP, or for estate and gift tax purposes. One could also throw in serious IPO candidates who obtain a valuation to avoid a “cheap stock” issue with the SEC.

Many private companies do not qualify for any of these scenarios; therefore they have not needed valuations in the past. As a result, companies and management that issue stock options could be somewhat unenthusiastic about this development. However, although a valuation in this situation can appear fairly cumbersome and superfluous, it’s not all bad - just ask auditors.

Auditors have expressed a desire for this to be done for years. They are cognizant of this development because valuing stock options is a financial reporting issue under FAS 123 and they want to know how a private company established the strike price of its options. There is some liability risk attributed to auditors when they sign off on this standard, and a professional valuation provides them with a level of reasonableness and reassurance that they desire. Considering this, there is a potential for tax and financial reporting synergy here.

With a good valuation report on hand, both issues could be satisfied simultaneously - two birds with one stone if you will. First, let’s examine the code and regulations driving this change.

Say Hello to the Culprits: IRC Section 409A requires private companies which award stock options that have exercise prices below fair market value to withhold income taxes on these grants. Significant penalties on non-complying option grants have placed private or closely held companies under increased pressure to be able to support and defend the fair market value determinations.

FASB 123, Accounting for Stock-Based Compensation, provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. FASB 15X (Working Draft - issued October 21, 2005), Fair Value Measurements, established a framework for measuring fair value under a wide variety of accounting pronouncements that require fair value measurements.

In developing FASB 15X, the Financial Accounting Standards Board considered the need for increased consistency and comparability in estimates of fair value and enhanced disclosures about the estimates.

In most cases, when company management determines value and option pricing using an informal, internally generated valuation, the tax burden will be on the company to prove to the IRS that the fair market value of the equity is reasonable. In light of the recent regulatory changes announced over the past year, many private companies are proactively adopting one of the “presumptive” stock valuation methods set forth in the proposed regulations.

Procuring a qualified independent appraisal will cause the burden of proof to shift to the IRS and may only be rebutted by the IRS if the application of the method is found to be grossly unreasonable.

Neil Lemons represents Dallas-based Erickson Partners, LLC, who have provided independent, accurate, defensible opinions, "http://www.ericksonpartnersllc.com"> business valuations & appraisals
for over 30 years. For more information, check out http://www.ericksonpartnersllc.com.