Considerations during an IRS Valuation Audit In 2004, the Internal Revenue Service issued its Business Valuation Guidelines, intended for use by IRS personnel, and since that time, the Internal Revenue Service has hired several hundred revenue agents who also hold appraisal designations.   Our valuation audit experience has been that the IRS tends to pursue a collaborative approach during the appraisal review process, seeking early resolution of appraisal issues, specially in cases where the taxpayer's representation team includes a valuation professional.      Common Issues during an IRS Valuation  Examination:   Inadequate Valuation Methodology. The appraisal must contain a statement to the effect that, in the appraiser's opinion, the appraisal was performed in accordance with Generally accepted valuation methods    Improper Application of the Fair Market Value Standard.  An IRS appraisal must be grounded on a consistent and relevant application of the fair market to the taxpayer’s particular facts and circumstances in light of any applicable treasury regulations.   Lack of Support for Valuation Adjustments.   Improper Valuation date.  Certain situations may require a specific valuation date and performing a valuation based on data before or after the required valuation date.  In cases where the valuation date differs from a traditional reporting date such as fiscal year ending date, end of the month, end of the quarter, etc., adjustments to financial data must be made to reconcile and adjust accounting information to conform with to the appropriate valuation date.   IRS Imposed Valuation Penalties.  The IRS may seek to impose accuracy-related penalties in case of a substantial valuation misstatement, i.e., one involving $5,000 or more in valuation misstatements ($10,000 in the case of a corporation other than an S corporation or a personal holding company).     Our IRS Audit Representation services are grounded on the following objectives:    1. Thoroughness.  Our valuation reports are self-contained, with a complete description of the appraised business or interest, and always include a full statement and analysis of the facts.   Our valuation reports also provide a detailed explanation of the valuation methods with a complete and detailed description of the data sources used to support our value conclusion   2. Impartiality. During the preparation of a valuation report, we continually self-test and critique our findings, and we try to deal with the issues in the same way that IRS appraisers would likely ask. We strive to provide answers and logical explanations in our valuation reports to these issues   3. Responsiveness. During an IRS examination, IRS agents may ask questions, orally or in writing, about the taxpayer’s appraisal process.    Our goal is to respond with all relevant facts, valuation methods, and the sources of data used to support the value conclusions   4. Working towards an agreement. We pursue any avenues of communication through taxpayer’s counsel and, when permitted, directly with IRS appraisers to identify, early on, any facts, valuation methods, models, and/or applied theories on which agreement may be possible.    Obviously, we cannot guarantee that the IRS will agree to any findings or results.   5. Collaboration.   We strive to ask questions and seek clarity from the IRS in order to understand an agent's valuation position, in a collaborative and constructive fashion      Our Audit Representation Services:   Typically, in a Department of the Treasury audit examination involving valuation issues, our audit representation services would involve:       1)  Corresponding via telephone, emails, postal service, etc., with the           Appointed Treasury Agent       2)  Attending audit conferences with the appointed Treasury Agent       3)  Assisting Client  to compile responses pursuant to documents          requested by the Service in connection with the Examination       4) Presenting to the Agent Client’s information to substantiate the tax         valuation positions taken by Client      5)  Conducting any tax research necessary to support the derived          conclusion of value and related tax positions      6)  Working Closely with Client's legal counsel in any Appeal of         Examination findings, if Client so request     Find out how we can help you email us, Valfor51@comcast.net