20.1.12  Penalties Applicable to Incorrect Appraisals

20.1.12.1  (08-27-2010)
Overview

  1. The Service has authority to penalize and to seek injunctions against appraisers. Prior to the passage of the Pension Protection Act of 2006 (Pub. L. No. 109-280), appraisers could only be subject to penalties under IRC 6700, Promoting abusive tax shelters, etc., or IRC 6701, Penalties for aiding and abetting understatement of tax liability.

  2. Section 1219 of the Pension Protection Act of 2006 added IRC 6695A, Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals. This new penalty provision allows the Service to assert a penalty against any person who prepared an appraisal of the value of property and who knew, or reasonably should have known, the appraisal would be used in connection with a return or claim for refund and that appraisal results in a substantial valuation misstatement (within the meaning of IRC 6662(e)), a substantial estate or gift tax valuation understatement (within the meaning of IRC 6662(g)), or a gross valuation misstatement (within the meaning of IRC 6662(h)) with respect to such property.

  3. The amount of the IRC 6695A penalty is the lesser of:

    1. The greater of:
      10 percent of the amount of the underpayment (defined by IRC 6664(a)) attributable to the misstatement
      or
      $1,000, or

    2. 125 percent of the gross income received from the preparation of the appraisal.

  4. The penalty does not apply if the appraiser can establish that the appraisal value "more likely than not" was correct. Pending further guidance, consult counsel regarding "more likely than not" determinations.

  5. This new penalty applies to appraisals prepared with respect to returns or submissions filed after August 17, 2006. However, if the appraisal relates to a facade easement donation, the penalty applies to returns filed after July 25, 2006.

20.1.12.2  (08-27-2010)
Who Asserts the Penalty

  1. Examiners have responsibility for asserting the IRC 6695A penalty.

  2. Examiners are encouraged to submit referrals to LMSB Engineering for assistance or consultation prior to asserting the penalty. Depending on the facts and circumstances of the related tax case Engineering support should be requested to fully develop the penalty case particularly if Engineering was not involved during the related tax examination. Referrals to Engineering should be made using the Specialist Referral System (SRS) identifying it as an IRC 6695A case.

20.1.12.3  (08-27-2010)
Asserting the IRC 6695A Penalty

  1. An IRC 6695A appraiser penalty case will be conducted as a separate and distinct case from the related tax examination.

  2. During the related tax examination, examiners will inquire, as warranted, to develop facts and circumstances to determine whether or not an IRC 6695A appraiser penalty case should be opened. This determination will be documented in the examination workpapers.

  3. All discussions related to appraiser penalties with either the taxpayer, return preparer, or designated power of attorney, will be limited to the development of facts to determine the applicability of a penalty. Penalties under IRC 6695A will not be proposed in the presence of the taxpayer.

  4. Generally, an IRC 6695A penalty against an appraiser will not be proposed until the related tax examination is completed at the group level. The appraiser penalty case can proceed when the related tax examination case is closed agreed, closed no response after default, is in Appeals or in Tax Court.

  5. If the claimed value of the property on the return or claim for refund, which is based on an appraisal, results in a substantial valuation misstatement, substantial estate or gift tax valuation understatement, or gross valuation misstatement, with respect to such property, the examiner should open an IRC 6695A, penalty case to determine if penalty against the appraiser are warranted.

    1. Substantial Valuation Misstatement. Generally, a substantial valuation misstatement under chapter 1 (Normal taxes and Surtaxes) occurs if the value of property is 150 percent or more of the amount determined to be the correct amount of such valuation, IRC 6662(e).

    2. Substantial Estate or Gift Tax Valuation Understatement. A substantial estate or gift tax valuation understatement occurs if the value of the property claimed is 65 percent or less of the amount determined to be the correct amount of such valuation, IRC 6662(g).

    3. Gross Valuation Misstatement. A gross valuation misstatement under Chapter 1 (Normal Taxes and Surtaxes) occurs when the claimed value of the property is 200 percent or more of the correct amount of such valuation, IRC 6662(h).

    4. Gross Estate or Gift Tax Valuation Understatement. A gross estate or gift tax valuation understatement occurs if the value of the property claimed is 40 percent or less of the amount determined to be the correct amount of such valuation, IRC 6662(h).

20.1.12.4  (08-27-2010)
Statute of Limitations

  1. The statute of limitations on assessment for an IRC 6695A, penalty expires three years from the later of:

    1. The due date of the related return, or

    2. The date the related return was filed.

  2. The statute on the appraiser penalty case under IRC 6695A can be extended using Form 872–AP, Consent to Extend the Time on Assessment of IRC Section 6695A Penalty.

  3. A transcript of the return on which the appraiser penalty is based should be included in the appraiser penalty case file for accurate monitoring of the expiration date.

  4. Signed consents should be obtained when the statute of limitations for assessing the appraiser penalty will expire within 180 days. See IRM 25.6.22.2.1(2)(a), Guidelines for Soliciting Extensions.

20.1.12.5  (08-27-2010)
Power of Attorney (POA)

  1. If a representative is to be included in correspondence or discussions of the IRC 6695A penalty, a Form 2848 , Power of Attorney and Declaration of Representative, will be needed that states "Civil Penalties" , in Part 1 item 3.

  2. Form 8821, Tax Information Authorization one or more appointee(s) to inspect and/or receive the appraisers confidential tax information in any office of the IRS. Item 3(a) Tax Matters must designate "Civil Penalty" for the IRC 6695A Civil Penalty.

  3. Additionally, please ensure that:

    1. The applicable "Year(s) or Period(s)" box is complete (i.e., "Dec. 31, 2008" or "12/31/2008," and not merely "2008" or "08" ), and

    2. The forms are processed according to Operating Division procedures in conjunction with IRM 21.3.7.6(3) and (4) guidance.

20.1.12.6  (08-27-2010)
Field Examination Procedures

  1. If the examiner determines a penalty is warranted, the examiner will prepare Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users, and secure the group manager’s approval. ERCS has the capability to request controls on penalty cases; these are not controlled on Audit Information Management System (AIMS).

  2. From the ERCS menu, the Group/Team secretary selects "Request Return" , then using submenu # 2, selects "Control Penalty Investigation" . Additional form instructions are noted below:

    1. Check One Box Only – Select the "Control Penalty Investigation" box;

    2. Taxpayer Name/Name Control – The name control of the appraiser;

    3. TIN – The TIN of the appraiser who prepared the appraisal used in connection with preparation of the return or claim for refund;

    4. Tax Period – The tax period of the return or claim for refund in which the appraisal was used;

    5. Form Type – Enter "Not applicable" ;

    6. Activity Code – Enter "552" ;

      Note:

      Based on the Activity Code "552", ERCS will automatically enter the MFT "PB" and the Source Code "99"

      ;

    7. Statute Date – Enter applicable date (3 years from the later of the due date of the related return or the date the related return was filed, unless an extension has been secured, then enter the extension date). The statute is extended for the appraiser using Form 872-AP;

    8. Project Code – If the appraiser penalty case is related to a project, enter the appropriate project code;

    9. Tracking Code – If the appraiser penalty case is related to a project with a unique tracking code, enter the appropriate tracking code;

    10. Related Return Information - The return or claim for refund that claimed the value of the property based on the appraisal; and

    11. Group Managers will indicate approval for the appraiser penalty case by signing and dating this form.

  3. Form 5345-D is used for ERCS users. Non-ERCS users should use Form 5345-B, Examination Request Non-ERCS Users.

  4. Once managerial approval is secured, the examiner will distribute copies of Form 5345-D or Form 5345-B as follows:

    1. Original – Remains in the penalty case file;

    2. Group Copy – Retained in the group for control purposes.

  5. Examiner time charges for the specific IRC 6695A appraiser penalty case will be charged to the MFT PB record, which applies it to activity code (AC) 552 for the appraiser's TIN. Time charges cannot be charged directly to AC 552.

  6. After securing approval, the examiner will contact the appraiser by phone to schedule an audit appointment. When two attempts to contact the appraiser by phone have been unsuccessful the examiner uses Letter 4477, Appraiser Appointment Letter, to schedule an audit appointment. The purpose of this meeting will be to gather sufficient facts to determine whether the appraiser can establish that the value in the appraisal meets the "more likely than not" exception as provided in IRC 6695A(c).

  7. If the appraiser cannot establish that the "more likely than not" exception applies, the examiner must propose an IRC 6695A penalty.

  8. Examiners will make appropriate third party contacts to develop all facts relevant to the determination of the appropriateness of the penalty. IRM 4.11.57, Third Party Contacts, contains the procedures for third party contacts and guidance for examiners making third party contacts (Letter 3164-P (DO), Third party notification for IRC 6700/6701 investigations, can be used for notification).

  9. If the examiner determines no penalty is warranted, Letter 4478, Appraiser Penalty No-Change Letter, will be prepared at the group level and left undated in the file. Technical Services will date and issue the letter if the case is selected for sample review, otherwise, the letter will be issued by Centralized Case Processing. (CCP). Form 3198 is used to alert CCP to issue Letter 4478.

    Note:

    Check the Other Letter block within the "Letter Instructions for CCP" section. In the Other Letter Block the Letter is 4478. Complete the for years line. Form 3198, Special Handling Notice for Examination Case Processing , The Form 3198 is attached to the outside of the case file .

  10. After consideration of all facts and circumstances, if the examiner determines an IRC 6695A penalty applies, the examiner will prepare Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, and Form 886-A, Explanation of Items, or its equivalent.

  11. Form 886-A, (or its equivalent), should include the following information:

    1. The basis for asserting of the penalty,

    2. Why the "more likely than not" statutory exception does not apply, and

    3. The appraiser’s position regarding the penalty.

  12. The examiner will prepare Letter 4485, Appraiser Penalty Assessment Notification Letter. This letter will advise of the proposed penalty, solicit payment, offer a supervisory conference, and provide an explanation of the dispute process. A copy of Form 886-A, Explanation of Items (or its equivalent) and other pertinent documents or workpapers should be included with this correspondence.

20.1.12.7  (08-27-2010)
Referrals

  1. Generally, examiners should exercise discretion when referring an appraiser to the Office of Professional Responsibility (OPR) based upon an assessed IRC 6695A penalty. Discretionary referrals to OPR should be based on a pattern of conduct that is subject to IRC 6695A penalty. However, where there is a willful violation of IRC 6695A, a referral to OPR is mandatory. A referral to the SB/SE LDC is mandatory when a penalty is asserted.

    1. The Office of Professional Responsibility referrals – use Form 8484, Report of Suspected Practitioner Misconduct. A copy of Form 886-A, Explanation of Items (or its equivalent), and other pertinent documents or workpapers should also be forwarded. Mail the referral Form 8484 to:
      IRS Office of Professional Responsibility
      Rm 7238 SE:OPR, Treasury Department Circular 230
      1111 Constitution Ave, NW
      Washington, DC 20224

    2. SB/SE LDC – use the SB/SE LDC Referral Form. A copy of Form 886-A, (or its equivalent), and other pertinent documents or workpapers should be included. Mail the SB/SE LDC Referral Form with Form 3210, Document Transmittal, to:
      Internal Revenue Service SB/SE LDC
      24000 Avila Road, Mail Stop 5040
      Laguna Niguel, CA 92677

20.1.12.8  (08-27-2010)
Penalty Case File

  1. Examiners will attach Form 3198, Special Handling Notice for Examination Case Processing, to each penalty case file, identifying it as an IRC 6695A, appraiser penalty case.

  2. Examiners will use the current version of Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, and will enter the following information:

    1. Line 1 – Enter appraiser name;

    2. Line 2 – Enter appraiser address;

    3. Line 3 – Check applicable box;

    4. Line 5 – Enter penalty case year;

    5. Line 6 – Enter the appropriate statute date;

    6. Line 7 – Enter the appraiser SSN or business EIN;

    7. Line 8 – Check applicable function;

    8. Line 9, page 1 column (c) and (d) – Enter the number of violations and the penalty amount (if no penalty is proposed, enter -0-);

    9. Line 10-13 – Enter examiner name (originator) and the manager name, the date Form 8278 was completed, organization code, and phone number. Both must sign the form in order for it to be valid. If not, the form will be returned to the originator for the signatures using Form 3210 procedures. Statute imminent Forms 8278 will be sent by FAX; and

    10. Line 14 – Group Manager signature and date to indicate approval of the penalty.

  3. Related Income Tax Workpapers - Include the first two pages of the related tax return, any schedules related to the understatement, and any relevant workpapers from the related file:

    1. Copy of the original appraisal prepared by the appraiser;

    2. Copy of the IRS Field Specialist Engineer’s and/or outside fee appraiser’s appraisal or appraisal review report;

    3. Copy of the examiner's revenue agent's report (RAR);

    4. Any documents, interview notes, or affidavits pertinent to the determination of the appraiser penalty; and

    5. Any other additional information deemed warranted by the examiner or manager.

    Caution:

    All information on the appraiser’s activities and the applicability of any penalties relating to the appraiser should be distinguished or separated from the taxpayer’s case file. If the information were included in the case file, it could be disclosed to the taxpayer if the taxpayer requested a copy of the case file. This could constitute an IRS disclosure violation, since information regarding the appraiser’s liability for penalties is confidential.

20.1.12.9  (08-27-2010)
IRC 6695A – Case File Assembly

  1. The case file will include the following:

    1. Form 3198, Special Handling Notice, for Examination Case Processing;

    2. Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, using the current version from the Electronic Publishing website;

    3. Form 886-A, Explanation of Items, or its equivalent;

    4. Form 4318, Examination Workpaper Index, used by field examiners or Form 4700, Examination Workpapers used by Tax Auditors;

    5. Form 9984, Examining Officers Activity Record;

    6. Form 5345-D, Examination Request - ERCS (Examination Returns Control System) Users, or Form 5345-B, Examination Request Non-ERCS Users;

    7. Copies of all correspondence to and from the appraiser;

    8. Documentation of the appraiser interview(s);

    9. Taxpayer and other third party contact interviews and affidavits;

    10. Copy of relevant work papers as described in item 3 above (see IRM 20.1.12.8);

    11. Copy of Form 8484, Report of Suspected Practitioner Misconduct; and

    12. Copy of the SB/SE LDC Referral Form, (if applicable).

20.1.12.10  (08-27-2010)
Appeal Rights - IRC 6695A Cases

  1. IRC 6695A penalties have post-assessment (but prepayment) penalty appeal rights.

  2. An appraiser may file a claim for refund utilizing Form 843, Claim for Refund and Request for Abatement. If the claim is denied and the appraiser has not had post-assessment Appeals consideration, administrative appeal rights will be granted by the Area or Campus when the basis for the claim does not conflict with Treas. Reg. 601.106(b) of the Statement of Procedural Rules or successor guidance. An appeal cannot be based on moral, political, constitutional, religious, or similar arguments.

  3. If the penalty has been paid in full, the appraiser may bring a refund suit in either the U.S. Court of Federal Claims or in a district court (1) immediately upon denial of the claim or (2) upon the expiration of six months after the date of filing the claim, if the Service has not acted within that time. The appraiser’s refund suit must be within two years of the date of denial of the claim.

20.1.12.11  (08-27-2010)
IRC 6695A - Case Processing and Assessment Instructions

  1. The IRC 6695A appraiser penalty case is not established or controlled on AIMS. The case must be established on ERCS prior to closing to Centralized Case Processing (CCP).

  2. An IRC 6695A appraiser penalty case will not be subject to mandatory review. Groups will close the case to the functional Centralized Case Processing Support following functional guidelines.

  3. An IRC 6695A appraiser penalty case will be assessed using Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, that is used by CCP to make the assessment of this penalty. The assessments will be input to the Penalty Master File through IDRS using Command Code ADJ54, carrier Transaction Code (TC) 290 with a zero amount, penalty reference number (PRN) 581, and the amount of the penalty.

    Reminder:

    Check the block for Civil Penalties (Form 8278), in the Special Features Section of Form 3198, Special Handling Notice for Examination Case Processing , The Form 3198 is attached to the outside of the case file .

  4. A notice to the appraiser (generally, a CP 15) will be generated explaining the assessment and appeal rights.

  5. If a penalty is proposed, the case will be closed from the group via ERCS with Disposal Code "12" and updated to Status Code "51" .

  6. If no penalty is proposed, the case will be closed from the group via ERCS with Disposal Code "02" and updated to Status Code "51" .

Exhibit 20.1.12-1 
IRC 6695A - Pro forma Explanation of Adjustments

The pro forma Explanation of Adjustments listed below can be download from Servicewide Penalties Web Page.

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Exhibit 20.1.12-2 
IRC 6695A - Job Aid

The interactive job aid listed below can be accessed at the Servicewide Penalties Web Page at http://sbseservicewide.web.irs.gov/penalty/news/205.aspx.

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