The most effective way to protect yourself and ensure your appraisal is accurate, fully documented, and substantiates the value is to hire an educated and competent appraiser.
First, hire an IRS Qualified Appraiser meeting the education and experience requirements as outlined in IRS Publication 561: Determining the Value of Donated Property. Ensure appraisers and appraisals strictly adhere to USPAP (Uniform Standards of Professional Appraisal Practice), follow sound valuation methodology, as set forth by personal property organizations, and ensure the appraiser is not a precluded individual with special attention paid to IRS Circular 230. This publication sets forth the high ethical and professional standards for professionals preparing tax documents for the IRS and precludes individuals from practice who have specific criminal record.
Second, review recent case law including Mann v US (2019) and the appeal (2021) as well as Loube v. Commissioner (2020). Both cases involved the same appraisal company and nonprofit. The public record includes the underlying appraisal report, which used the Cost Approach to Value, or the Cost New Less Depreciation. This is not proper valuation methodology. Basing values on actual market sales data or the Sales Comparison Approach should be followed in close to 95% of all personal property appraisals. Additionally, the appraiser was shown to have valued inventory that was not constructively donated to the nonprofit, another critical red-flag.
Third, watch for gimmicks. If an appraiser is claiming Zero Audits or providing 100% Accuracy guarantees, dig into these claims. The IRS audits a client not their appraisal firm. Ask the appraisers, making these promises, if they will cover the tax deficiency in total that could be triggered by a partial or complete disallowance of the non-cash contributions should the IRS determine that the appraiser is not qualified and/or the appraisal is deficient. Going further, ask if they will also cover penalties and interest. Insurance policies typically offer coverage against client complaints in the form of lawsuits. Ask the same appraiser if they also agree to cover the legal fees of the client they will be forced to pay, out of pocket, should they bring suit to collect lost funds due to the appraiser’s actions. A typical lawsuit costs upwards of $20,000. Insurance policies can cover negligence, errors in services given, omissions, misrepresentation, violations of good faith and fair dealing and/or inaccurate advice. And note that almost all insurance policies do not cover gross negligence, criminal, or illegal acts.
Fourth, donate confidently. Numerous industry seminars have hosted IRS Counsel as presenters. The IRS is not looking to summarily negate non-cash charitable contributions. However, these contributions must be documented completely with values fully substantiated based upon market sales.
At The Green Mission Inc. and Probity Appraisal Group, our staff includes IRS Qualified Appraisers with the requisite experience and education. We ensure all IRS Code, USPAP, and professional appraisal organization standards are adhered to with exactness.
