Not as easy as you would think.

The possibility of penalties for donors and heirs adds a precarious element to the task of assessing the value of artwork.

To ensure that an artwork's valuation is precise for tax-related purposes, owners should collect comprehensive evidence of the piece's provenance and quality.

Assigning a value to a work of art can be a precarious undertaking, as the Internal Revenue Service (IRS) has the power to reject valuations that are deemed excessive or inadequate. This can lead to tax liabilities and penalties for taxpayers who have undervalued or overvalued their art collections. As such, the process of determining the worth of artwork can be a risky proposition.

Although the US tax season has ended, art collectors still face ongoing challenges. For instance, individuals who donate valuable artworks to museums must assign a precise value to the pieces in order to claim a charitable deduction on their tax filings. Similarly, heirs of collectors with art in their estates encounter the same challenge of determining the value of the artwork. This task can be particularly daunting as possible penalties for donors and heirs make the process a high-stakes affair.

Assigning a value to a work of art can be a precarious undertaking, as the Internal Revenue Service (IRS) has the power to reject valuations that are deemed excessive or inadequate. This can lead to tax liabilities and penalties for taxpayers who have undervalued or overvalued their art collections. As such, the process of determining the worth of artwork can be a risky proposition.

The Internal Revenue Service (IRS) provides support to taxpayers in the form of pre-appraisals through its Art Appraisal Services, known as a Statement of Value. However, this aid comes at a cost of $7,500 for one to three items, with an additional fee of $400 for each subsequent item. If any items are identified as problematic, they are referred to the IRS's Art Advisory Panel. The Panel consists of approximately 25 experts, including dealers, scholars, curators, and academics, who review works with a value of $50,000 or more.

Based on the panel's annual reports, taxpayers are at a significant risk of receiving a bill from the federal agency. In the most recent report for the 2021 fiscal year, only 35% of the appraisals submitted were approved, while 26% were considered excessively high for charitable donations, and 39% were judged as too low for items in estates. Across all 112 object appraisals assessed by the panel, a total of $16,806,838 in misrepresented appraised values was uncovered.

Be cautious of the potential penalties for inaccurately reporting the value of assets.

The IRS has raised concerns about the accuracy of art and antique appraisals submitted with tax filings, prompting legislative action. The Pension Protection Act of 2006 introduced penalties for "gross valuation misstatements" to address this issue.

According to this law, taxpayers who submit appraisals with values that differ from the actual value of an object by 150% or more will be penalized with an assessment equal to 30% of the tax underpayment. This penalty is separate from the payment of the adjusted tax and interest on the amount. If the underpayment is less than $1,000 or if the appraisal was made "in good faith," the taxpayer may not be required to pay additional tax.

Disputes over the valuation of objects are not necessarily the result of appraiser malpractice or taxpayer greed. The IRS maintains that an object has only one price, while appraisers argue that the price an object might command at auction could differ greatly from what it might cost if a buyer sought to purchase it. Fans of the popular PBS program Antiques Roadshow (the US version of the BBC program) know that two different valuations are often given for the same item: one for the auction estimate and another for insurance purposes.

Alice Duncan, a senior director at Gerald Peters Gallery in New York and a member of the Art Advisory Panel, notes that appraisers sometimes contact her seeking advice on what to avoid and what might trigger an examination by the panel, rather than specific guidance on value. Instead of providing a direct answer, she advises them on what constitutes a professional appraisal submission: high-quality photographs, thorough and expertly qualified condition reports (particularly if condition affects the valuation), and a reasoned discussion of the appraiser's valuation decision. Additionally, evidence of research, such as a catalogue raisonné number, is a strong indication of both the quality of the report and the expertise of the appraiser.

By requesting an early valuation appraisal from the IRS, you can avoid being held accountable for undervaluing or overvaluing artwork. Obtaining Statement of Value determinations from the Art Appraisal Services, according to New York attorney Ralph Lerner, "helps administer the estate so you can distribute the assets." It doesn't matter what the appraisal service determines to be an item's value is because "the IRS is bound by that value, so I could take pieces from the estate, put them up for auction, and, if they old for higher than the IRS ruling values, I will only have to pay capital gains tax on the increase, and not the 40% estate tax on the increase in value," Lerner claims.

Nevertheless, Lerner cautions that the IRS may reject or stall the issuance of an advance ruling for estate tax purposes. This is because the IRS may inquire whether the executor intends to sell the artwork shortly after obtaining the ruling. Lerner explains that the sale price of an artwork is the best indicator of its value, particularly if the sale occurs shortly after the appraisal. As a result, the IRS does not want to be put in an awkward position by issuing a ruling that values an artwork at $10 million, for instance, which is legally binding on the IRS, only for the artwork to sell nine months later for $15 million.

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