$5000 and “Formal Appraisal” vs. “Qualified Appraisal”

(by Dave Maloney) This is Post 2 of 3. It, along with two additional posts, will address when qualified appraisals are required, when they must be attached to the taxpayer’s return, and related issues. See Post 1 of 3. See Post 3 of 3.

Question: “I would like to know when the IRS requires a formal appraisal for donated items. I have done several charitable donations and a donation that is more than $5000 need an appraisal. Is the cut off limit still $5000.00 or has it gone up or down?”

Answer: First of all, let’s address terminology. I think that the term “formal appraisal” is not in our appraiser’s lexicon. I think what you are referring to is better termed “qualified appraisal.” Many look-alike terms are bandied about by appraisers, but I think it is best to stick with terms used by the IRS or by USPAP whenever possible. The IRS has very clear definitions of what constitutes a “qualified appraisal” and “qualified appraiser” (see http://www.irs.gov/irb/2008-40_IRB/ar13.html) including when a “qualified appraisal” is required to be obtained by the taxpayer and when a “qualified appraisal” is and is not required to be attached to the return by the taxpayer. No such specifications are provided for the term “formal appraisal,” though many of us mistakenly use that term off and on when, in actuality, we mean “qualified appraisal.”

To answer your question: Yes, for the most part $5000 is still the threshold. But please read for yourself. Take a look at IRS Pub 561 (Determining the Value of Donated Property) http://www.irs.gov/pub/irs-pdf/p561.pdf and IRS Pub 526 (Charitable Contributions) http://www.irs.gov/pub/irs-pdf/p526.pdf for clarity regarding donations of property having various fair market value levels, when the taxpayer is and is not required to obtain a qualified appraisal, and when the taxpayer is and is not required to attach IRS Form 8283 (Section A and/or Section B), and is and is not required to attach the qualified appraisal to the return.

So, why my preference for the use of the term “qualified appraisal”? The reason is that the IRS now requires that taxpayer deductions for donations of non-cash items valued in excess of $5000 (or for certain clothing and household goods in less than good condition and valued in excess of $500 as I address in a separate discussion) be supported by “qualified appraisals” performed by “qualified appraisers.”

Read “Internal Revenue Bulletin: 2006-46; November 13, 2006; Notice 2006-96; Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions” (http://www.irs.gov/irb/2006-46_IRB/ar13.html) which states:

.02 Transitional terms-qualified appraisal

(1) Qualified appraisal. An appraisal will be treated as a qualified appraisal within the meaning of § 170(f)(11)(E) if the appraisal complies with all of the requirements of § 1.170A-13(c) of the existing regulations (except to the extent the regulations are inconsistent with § 170(f)(11)), and is conducted by a qualified appraiser in accordance with generally accepted appraisal standards. See sections 3.02(2) and 3.03 of this notice.

(2) Generally accepted appraisal standards. An appraisal will be treated as having been conducted in accordance with generally accepted appraisal standards within the meaning of § 170(f)(11)(E)(i)(II) if, for example, the appraisal is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice (“USPAP”), as developed by the Appraisal Standards Board of the Appraisal Foundation. Additional information is available at http://www.appraisalfoundation.org.

Note in the above what has come to be termed the “substance and principles” rule. Simply put, donation appraisals supporting taxpayer deduction claims for the donation of non-cash property in excess of $5000 in FMV must be “qualified appraisals” which are defined as those appraisals performed in accordance with generally accepted appraisal standards which incorporate the “substance and principles” of USPAP.

In this 2008 Bulletin, the IRS even doubled-down on its “substance and principles” rule: Internal Revenue Bulletin: 2008-40; October 6, 2008; REG-140029-07; Notice of Proposed Rulemaking Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions” (see http://www.irs.gov/irb/2008-40_IRB/ar13.html).

Currently, there is only one “generally accepted appraisal standard” in the US. That is USPAP.

In addition, there is no other standard (generally accepted or not) of which I am aware that conforms to the “substance and principles of USPAP”. Single page check-off lists do not conform to the “substance and principles of USPAP.” Nor do standards which specifically state that they are not USPAP-based.

Where does all this leave us? To me, it is clear that an individual who does not perform “qualified appraisals” (for donation appraisals of non-cash charitable contributions for which the taxpayer is claiming a deduction in excess of $5000) in accordance with USPAP is a disqualified appraiser and, thus, prohibited from performing appraisals for such an intended use.