Demystifying IRS Appraisal Compliance
Last month, I had the pleasure of attending the Appraisers Association of America National Conference in New York, where Museum Exchange returned as sponsors of the IRS Appraisals panel. The session provides a rare opportunity to hear directly from the IRS representatives responsible for reviewing appraisal reports and drafting the regulations that govern charitable contributions. It’s no surprise that it is one of the most popular panels each year. The topic is especially important to us at Museum Exchange, as IRS compliance is an integral part of the donation process.
I wanted to share the most relevant information that was discussed so that you, too, can be aware of them as you prepare for your tax filings.
Form 8283s: All the fields in Section B should be completed, otherwise the tax deduction can be disallowed. The IRS is zeroing in on this, especially the omission of the cost basis in Part 1. 3. (f). The IRS uses this information to compare the purchase price to the Fair Market Value and may scrutinize a large increase within a short period of time. In the case of multiple artworks reported on the same Form 8283, it is recommended to list the artwork details for at least the first two artworks in rows A and B and then write “see attached” in row C and append a complete list of artworks.
Reporting Similar Items: Only “Similar Items of Property” should be listed on the same Form 8283. This is one of the most common questions that we get because what qualifies as “similar” is somewhat ambiguous. As a general rule, artworks from the same category (i.e. paintings, sculptures, prints, drawings, etc.) are considered similar items. So in the case of a multi-artwork donation to a single donee, separate Form 8283s are required for each category even though all the artworks can be included on the same appraisal report (with their individual values indicated). However, when determining whether the $5,000 threshold for a qualified appraisal has been exceeded in a given calendar year, you should aggregate donations across all artwork categories, not within them.
Comparables: At least three comparable sales should be included in appraisal reports, although it is not explicitly stated by the IRS. This is recommended for artworks valued in excess of $50,000. For lower valued artworks, the art appraiser is just required to maintain records of comparable sales in their work files. As a general rule, the higher the value of artwork, the more information and higher-quality photographs you should provide.
Partial Deductions: In the event of a partial deduction, the appraiser should determine the total Fair Market Value of the artwork in the appraisal report but the taxpayer should only claim the value of the charitable contribution. This applies to bargain sales, in which a taxpayer sells an artwork to a public charity such as a museum for a discounted price and claims the difference between the sale price and the total Fair Market Value as a donation. This also applies to donated artworks that are jointly owned, in which each taxpayer claims the value of their portion of the total Fair Market Value (e.g. 50%). In both cases, the appraisal report can state the circumstances (i.e. bargain sale or joint ownership) but it is not required.
Qualified Appraisers: Appraisal reports must be completed by a “qualified appraiser,” otherwise the deduction can be disallowed. Qualified appraisers have met certain minimum education and experience requirements, received a designation from a recognized professional appraiser organization (like the Appraisers Association of America), and regularly perform appraisals for which they receive compensation. During the panel, a recent case was reviewed in which the IRS disputed a multi-million dollar donation of Chinese art by a museum trustee due to the fact that the appraiser that completed the appraisal report was not a qualified appraiser, despite being an auction house specialist.
Hopefully this demystifies the IRS appraisal requirements for you somewhat. We know that claiming charitable contributions can be both confusing and stressful so we’re here to help. Don’t hesitate to reach out with any questions or with an appraisal report request. A benefit of working with our valuation partners is that we can ensure a smooth process for you.
Joseph Grigely, We're Drunken Bantering About What's Important in Life, 2007. Ink and pencil on paper, 46 x 168 inches. Collection of Akron Art Museum, Akron, OH; Gift of Martin Z. Margulies Foundation