Tax season is quickly approaching, and fear of an audit may be on the minds of some of your clients. While most IRS audits are unlikely (1 in 100), clients filing valuations with estate tax returns are very likely.

“This is the I.R.S.’s last whack at the apple,” said Jonathan Heralds, of Herzfeld & Rubin in his interview with the NY Times. “The single most important factor is credibility. Meticulous preparation of an estate tax return reflecting accurate information supported by thorough documentation attached, enhances credibility.”

Estate tax returns are a convenient way for the IRS to assert additional taxes if they find red flags on a return. Therefore, the best way to handle an audit properly is with an expert as your partner.

Know this about IRS valuation audits

These three red flags initiate audits.

  1. Estates that exceed $600,000
  2. Unreported gifts of more than $10,000
  3. Interfamily transfers and perceived inaccurate information not supported by documentation

“The average business owner grossly underestimates the value of a business,” said Edward A. Slott of Rockville Centre, L.I. “It should be appraised every few years by a professional business valuation expert, and anytime a significant change is made.”

As a trusted tax or financial advisor, part of your role is to anticipate IRS challenges on behalf of your clients. Most importantly, provide them guidance about proper documentation, especially as it relates to valuation.

Be aware that the IRS likes to challenge:

  • Multi-tiered discounting on related entities;
  • Company specific risk premium;
  • Discounts on liquid assets;
  • Pass-through entities that have an ambiguous business purpose; and
  • Entities that have unclear control features.

Consequently, your tax and estate planning clients are likely at risk for an audit. Make sure they know their options for managing and defending against an IRS audit.

Key Takeaway

In conclusion, the stakes are both emotionally and financially high when an audit is pending. So, arm yourself with a specialist who has high credibility. Preferably one who has effectively defended valuation methodologies against the IRS for both small and large clients.

When an audit does occur, your best defense is a good offense. Hence, your professional understanding of the issues surrounding valuation and related tax implications will reap long-term benefits for your clients.

Quist Valuation has 35-years of experience in business valuation. We have performed hundreds of valuations for gift and estate tax purposes and successfully defended valuations on behalf of our clients to the IRS with positive results. We understand the common challenges and proactivley address issues in our reports in order to best position our clients with the IRS. We’re a proud partner in preventing and managing audits when they do occur. Contact us to see how we can assist your clients in a valuation or prepare for an audit. Connect online or call 303-494-1664.

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Disclosure: IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written by us to be used, and cannot be used, (i) by any taxpayer for the purpose of avoiding tax penalties under the Internal Revenue Code or (ii) for promoting, marketing or recommending to another party any transaction or matter addressed herein.