Page 11 - Business Valuation for Estates & Gift Taxes

VS section 100 provides valuation analysts more structure—not only on what to include in a valuation
report, but also a better defined timeframe within which the facts and circumstances should be consid-
ered relevant for purposes of the valuation report. fn 3

A valuation performed for a matter before a court, arbitrator, mediator, or in a governmental or adminis-
trative proceeding is exempt from the reporting provisions of VS section 100. It is worth noting, howev-
er, that the exemption applies only to the reporting provisions of VS section 100 and does not apply to
the developmental provisions of VS section 100. Valuations prepared for estate and gift tax purposes do
not qualify for this exemption. VS section 100 also includes appendix A, "Illustrative List of Assump-
tions and Limiting Conditions for a Business Valuation"; appendix B, "International Glossary of Busi-
ness Valuation Terms"; and appendix C, "Glossary of Additional Terms." The valuation analyst may al-
so consult Interpretation No. 1, "Scope of Applicable Services" (AICPA, Professional Standards, VS
sec. 9100 par. .01–.89), of VS section 100.

Statute of Limitations and Other Audit Considerations

Valuation analysts may be retained to prepare conclusions of value for federal and state estate and gift
tax returns (collectively referred to as "tax return(s)") for their clients. IRS scrutiny makes it imperative
that tax returns are properly and accurately prepared on time to prevent unnecessary delays and inquiries
that could have serious ramifications for clients, as well as for the professional who prepared the tax re-
turns. The statute of limitations for the IRS to audit a tax return is generally three years from the date of
filing; however, the IRS does have the ability to modify that timeline if circumstances warrant an exten-
sion. In circumstances where no tax return is filed, the statute of limitations never starts and the IRS can
challenge the tax return indefinitely. If a tax return is filed but it is incomplete or the support is insuffi-
cient (for example, poor documentation, missing forms, and so on), the IRS can take the position that the
statute of limitations has not yet begun and subject the tax return to an audit for as long as the IRS con-
siders the support for the amounts disclosed in the return to be insufficient. This could result in, at a
minimum, a delay in settling the decedent’s estate to much more punitive actions such as additional tax-
es and fines. fn 4 Therefore, as noted earlier, in order to provide the most thorough documentation to the
IRS, the valuation analyst should prepare and submit only a detailed valuation report when conducting a
valuation for estate and gift tax purposes.

The following statistics should help further emphasize how important well documented valuation reports
are when submitted for estate and gift tax purposes. The Internal Revenue Service Data Book 2012 re-
ported of the 12,582 estate tax returns filed in 2011, the IRS audit rate of these returns was 29.9 percent!
Estates with assets of $5 million up to $10 million had an audit rate of 58.6 percent, and estates above
$10 million had an effective audit rate of 116 percent (due to the investigation into returns filed in tax
years prior to 2011). Valuation analysts should anticipate that any valuation report submitted as support
for an estate and gift tax return will most likely be reviewed and audited by the IRS. Best practices

fn 3
See chapter 4, "Overview of Case Law," within this practice aid.
fn 4 Title 26 of U.S. Code of Federal Regulations (CFR) requires that when an estate and gift tax return is filed, it must contain suffi-
cient support for the amounts included in the return. The IRS has defined this as "adequately shown." Failure to "adequately show" the
proper amounts on the return allows the IRS to audit and possibly collect additional taxes on the return at any time (that is, statute of
limitations never begins). The criteria for what is considered adequately shown is provided at 26 CFR 301-6501(c)-1(e)(2) and in-
cludes, among other things, requirements to disclose (a) detailed description of how values were determined, (b) financial statements,
and (c) relationships between all interested parties.

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