Consistent with recommendations from the AICPA, the IRS has revised its procedures and related letter regarding the assertion of an IRC Section 6695A penalty for substantial and gross valuation misstatements. We believe this action will provide a more equitable treatment for our members providing valuation services and are grateful to the IRS for listening to and acting on our concerns.
In February of 2010, the IRS Office of Servicewide Penalties invited the AICPA, along with the other major appraisal organizations, to discuss the implementation of the IRC Section 6695A penalty. In the initial meeting and follow-up discussions, we noted our significant concerns with the IRS’ internal procedures regarding the penalty and, in particular, use of Letter 4477. That letter was used to inform a valuation analyst that the IRS was proposing a penalty under IRC Section 6695A, and was sent before the appraiser had an opportunity to explain the basis of the appraisal and respond to any questions from the IRS.
In our discussions, we stressed that the valuation analyst should have the opportunity to defend the valuation before a Letter 4477 is sent proposing a penalty. Under the new procedures, before the IRS sends a Letter 4477, the IRS will make two attempts to contact the appraiser by phone to schedule an appointment to discuss the valuation. If the appraiser does not respond, the IRS will then send the appraiser a Letter 4477.The new Letter 4477, which can be found here, no longer states that the IRS is proposing a penalty; it is used to schedule an appointment to discuss the appraisal and whether the section 6695A penalty might be appropriate. If, following the meeting the IRS determines a penalty is necessary, Letter 4485, Appraiser Penalty Assessment Notification Letter will be issued. For more information on the IRS procedures regarding the section 6695A penalty, see Internal Revenue Manual, Part 20, Chapter 1, Section 12, Penalties Applicable to Incorrect Appraisals.