IRS Improving Art Appraisal Services

An appraisal is an expert assessment of the value of a particular asset at a given time. Many factors involved in the appraisal of a property can easily distort its value--overvaluing or undervaluing it. The IRS uses appraisals in the process of assessing property taxes, which requires the appeal of experts in the subject. As such, the IRS's Art Appraisal Services' (AAS) job consists of assessing the value of works of art for tax purposes.

A recent article in Accounting Today discusses the IRS' need to improve its appraisal of the value of art and the Government Accountability Office (GAO) report on the matter. The GAO report set the spotlight on the lack of comprehensive quality review and continuing education requirement for the IRS' appraisers, which consistently result in a misstated and most times unfavorable appraisal for the taxpayer.

The report examined not only the appraised values of artwork but also other categories of property such as real estate, automobile and businesses, reaching the conclusion that the burden on taxpayers could be reduced and selected practices improved.

Concerning art appraisals, the report found that the valuation of the property has a huge impact on the tax liabilities of individuals who make non-cash charitable donations or who receive inheritances or gifts of property. Appraisers' task requires them to be familiar with the subject matter and be able to note any factors that may affect the value of the property (e.g., location, surrounding area and condition of the property). But, some properties such as art, real estate, businesses and easements have very unique characteristics, making an independent appraisal essential to determine exactly how much the taxpayer should report to the IRS.

The GAO recommended that the IRS offer a continuing education program to its appraisers, along with a comprehensive quality review program, specifically for the AAS staff. They also suggested that Congress should consider raising the dollar threshold at which qualified appraisals are required for noncash contributions to reflect inflation.

Losing the Family Home Over a $400 Tax Bill

Senior care advocates repeatedly remind families that oversight is needed in some cases to ensure seniors do not fall victim to financial exploitation. Beyond protecting against scammers and hucksters, many seniors are facing a new financial crisis that is not rooted in illegal misconduct. When on a fixed income and struggling with confusing money issues, some seniors might face incredibly severe financial penalties for falling behind on certain bills or taxes.  CNN Money reported this week on a growing number of individuals who are losing their homes because they owe relatively small sums.  A report from the National Consumer Law Center (NCLC) detailed how some states have outdated laws that allow states to sell tax liens on delinquent properties.  This means that instead of the government having a lien on a piece of property that owed back taxes or bills for services like water and gas, private investors own the lien.  The investor then collects interests on the overdue bill or, in some cases, forecloses on the home.  Some states allow investors to charge staggeringly high interest rates, from 15% to 50%.

Seniors are particularly vulnerable to falling behind in this way, either because of challenges of being on a fixed income or confusion with the bill paying process.  The NCLC report details one case of an 81-year old woman who lost the home she lived in for 40 years because she owed $474 on a sewer bill.  The NCLC report noted that seniors with cognitive diseases, like dementia and Alzheimer's are prone to fall victim to this situation.  It is very confusing to follow the changing financial arrangements.  The seniors are usually notified of the situation in legalese that many do not understand.  As a result, they do nothing, rack up interest debt, eventually default, and often lose their home.  The report elaborated that seniors without family members or who have not visited with elder law attorneys and other professionals were more likely to be hurt by this situation.  In one case, an elderly woman who lived alone without family fell back $5,000 on taxes.  Eventually, she lost her home and lost about $150,000 in equity that she had accumulated.

Advocates are working to change laws so that interest rates are lowered and adequate warnings are provided to homeowners.  It remains unclear if those efforts will be successful, and so putting preventative measures in place now is prudent for local seniors to avoid this situation.

How Does the Affordable Care Act Affect Taxes and Estate Planning?

No legal news item last week was bigger than the U.S. Supreme Court's decision to uphold virtually the entirety of the Affordable Care Act. In a move that surprised many observers, in a 5-4 decision the Court deemed the controversial "individual mandate" portion of the measure constitutional on grounds that it constituted a tax. While the court held that the Congress could not pass the law pursuant to its power to regulate interstate commerce, it did find it a permissible use of the legislature's taxing power.

Now that the matter is reasonably settled, local residents may be wondering how the law affects their estate planning, if at all. A recent Smart Money story talked about some of these issues, explaining how certain tax matters will indeed change in the upcoming year as a result of the decision. A few select rates will change next year. For example, an extra .9% Medicare tax increase will start for various individuals making over $200,000 or $250,000. In addition, some investment income (long-term capital gains and dividends) may face a 3.8% "Medicare contribution tax." This is in addition to the rising rates if the "Bush tax cuts" expire without renewal.

Starting in 2013, a cap will be added on contributions to a healthcare "flexible spending account" (FSA) plan. Right now there is no cap, so an unlimited amount of money can be contributed to the plan which is then subtracted from taxable income. The money can be used to reimburse qualified medical expenses. Starting next year, contributions to those plans will be capped at $2,500. Similarly, itemized deductions for medical expenses will now apply only to expenses that exceed 10% of annual gross income (up from the current 7.5%).

However, it is important to keep these tax issues in perspective, because they represent just a part of the bill. The overall goal is to provide comprehensive health insurance for more Americans so that overall expenditures go down while quality of care goes up, but the long-term effect of these sweeping changes will not be fully fleshed out for years to come. While the high-profile and controversial nature of the law may suggest that many things will change for all residents once it is fully in effect, the truth may be a bit less dramatic for many local families.

Did You Know Your Taxes Are Going Up?

At a recent national meeting of the American Academy of Trust, Estate and Elder Law Attorneys, a premier educational seminar for estate planning attorneys, a major topic we discussed was taxes.  There are some important increases that you should know about.

Taxes are scheduled to increase dramatically in 2013: 

 

                                                                           2012                  2013

Estate and Gift Tax – Top Tax Rate                       35%                   55%

Estate and Gift Tax Exemption                              $5 million           $1 million

Federal Income Taxes – top rates

         Capital Gains                                              15%                   20%

         Qualified Dividends                                      15%                   39.6%

         Interest & Compensation Income                  35%                   39.6%

        

In the current political climate, Congress and the President are not likely to reach a compromise on these issues.  What does this mean for you?  2012 is a year of opportunity while taxes are lower.  It would be wise to schedule an appointment to review your estate plan before September 1, and see if there are steps you can take to improve your family’s position.  If you wait to the last minute, it may not be possible to put a plan in place before the law changes.