20.1.12. Penalties Applicable to Incorrect Appraisals

(1) Purpose: The purpose of this IRM section is to convey policy as set by the Office of Servicewide Penalties (OSP) as it relates to penalties for incorrect appraisals.

(2) Audience: This IRM provides policy and guidelines to be followed by all operating division employees and processing functions that address appraiser penalties..

(3) Policy Owner: The Business Support Office (BSO) is under Operations Support (OS). The SB/SE Operations Support BSO office is responsible for overseeing civil penalties including penalties for incorrect appraisals.

(4) Program Owner: Office of Servicewide Penalties (OSP) is responsible for incorrect appraisal penalties.

(5) Primary Stakeholder: SB/SE, TEGE, LB&I

(6) Contact Information: To recommend changes or make any other suggestions to this IRM, e-mail OSP at servicewide.penalties.team@irs.gov. Also see IRM 1.11.6.6, Providing Feedback About an IRM Section - Outside of Clearance.

(1) Examiners and attorneys have responsibility for asserting the IRC 6695A, Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals, penalty.

(2) Examiners and attorneys will submit a referral for Engineering Program assistance and/or consultation related to potential penalties, prior to asserting the penalty, when assistance of an IRS appraiser or valuation specialist is needed, and a potential IRC 6695A recommendation from an examining appraiser was not received. Referrals can be made via the Specialist Referral System located at https://srs.web.irs.gov/ and should specify the case as a 6695A case.

(3) If IRS appraisers or valuation specialists assigned to an income or, estate or gift tax examination determine a valuation misstatement has occurred in accordance with provisions set forth in IRC 6695A, the examining appraiser will:

1. Obtain the immediate supervisor’s written approval (email, memorandum, or other written form), and

2. Notify the examiner or attorney the case is a potential IRC 6695A penalty case through a memorandum. See IRM 20.1.12.7.2.

(1) An IRC 6695A appraiser penalty case will be conducted as a separate and distinct case from the related tax examination.

(2) During the related tax examination, examiners and attorneys will, as warranted, develop facts and circumstances to determine whether or not an IRC 6695A appraiser penalty case should be opened. This determination will be documented in the examination workpapers.

(3) All discussions related to appraiser penalties with either the taxpayer, return preparer, or designated power of attorney, will be limited to the development of facts to determine the applicability of a penalty. Penalties under IRC 6695A will not be proposed in the presence of the taxpayer.

(4) Generally, an IRC 6695A penalty against an appraiser will not be proposed until the related tax examination is completed at the group level. The appraiser penalty case can proceed when the related tax examination case is closed agreed, closed no response after default, is in Appeals or is in Tax Court.

(5) The penalty does not apply if the appraiser can establish the appraisal value "more likely than not" was correct. Pending further guidance, consult Counsel regarding "more likely than not" determinations.

(6) The amount of the IRC 6695A penalty is the lesser of:

1. The greater of:
   10% of the amount of the underpayment (defined by IRC 6664(a) attributable to the misstatement)
   or
   $1,000, or

2. 125% of the gross income received from the preparation of the appraisal.

(7) If the claimed value of the property on the return or claim for refund, which is based on an appraisal, results in a substantial valuation misstatement, substantial estate or gift tax valuation understatement, or gross valuation misstatement, with respect to such property, the examiner or attorney should open an IRC 6695A penalty case.

1. Substantial Valuation Misstatement. A substantial valuation misstatement under Chapter 1 (Normal Taxes and Surtaxes) occurs when the claimed value of the property is 150% or more of the correct amount of such valuation, IRC 6662(e).

2. Substantial Estate or Gift Tax Valuation Understatement. A substantial estate or gift tax valuation understatement occurs if the value of the property claimed is 65% or less of the amount determined to be the correct amount of such valuation, IRC 6662(g).

3. Gross Valuation Misstatement. A gross valuation misstatement under Chapter 1 (Normal Taxes and Surtaxes) occurs when the claimed value of the property is 200% or more of the correct amount of such valuation, IRC 6662(h).

4. Gross Estate or Gift Tax Valuation Understatement. A gross estate or gift tax valuation understatement occurs if the value of the property claimed is 40% or less of the amount determined to be the correct amount of such valuation, IRC 6662(h).

(1) The statute of limitations on assessment for an IRC 6695A penalty expires three years from the date on which:

1. The return, with respect to which the penalty is assessed, was filed (a return filed prior to the due date is deemed to be filed on the due date), or

2. The claim for refund, with respect to which the penalty was assessed, was filed.

(2) The statute on the appraiser penalty case under IRC 6695A can be extended using Form 872-AP, Consent to Extend the Time on Assessment of IRC Section 6695A Penalty.

(3) A transcript of the return on which the appraiser penalty is based should be included in the appraiser penalty case file for accurate monitoring of the statute expiration date.

(4) Signed consents should be obtained when the statute of limitations for assessing the appraiser penalty will expire within 180 days. See IRM 25.6.22.2.1(2), Guidelines for Soliciting Extensions.

(1) If a representative is to be included in correspondence or discussions of the IRC 6695A penalty, a Form 2848, Power of Attorney and Declaration of Representative, is required reflecting "Civil Penalties" in Part I Line 3.

(2) Form 8821, Tax Information Authorization is used to authorize one or more appointee(s) to inspect and/or receive the appraisers confidential tax information in any office of the IRS. Item 3(a) Tax Matters must designate "Civil Penalty" for the IRC 6695A Civil Penalty.

(3) Additionally, please ensure:

1. The applicable "Year(s) or Period(s)" box is complete (i.e., "Dec. 31, 2008" or "12/31/2008," and not merely "2008" or "08"), and

2. The forms are processed according to Operating Division procedures in conjunction with IRM 21.3.7.5 guidance.

(1) If the examiner or attorney determines a penalty is warranted, the examiner or attorney will prepare Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users, and secure the group manager’s approval. ERCS has the capability to request controls on penalty cases not controlled on Audit Information Management System (AIMS).

(2) From the ERCS menu, select "Request Return", then using submenu # 2, selects "Control Penalty Investigation." Additional form instructions are noted below:

1. Check One Box Only – Select the "Control Penalty Investigation" box;

2. Taxpayer Name/Name Control – The name control of the appraiser;

3. TIN – The TIN of the appraiser who prepared the appraisal used in connection with preparation of the return or claim for refund;

4. Tax Period – The tax period of the return or claim for refund in which the appraisal was used;

5. Form Type – Enter "Not applicable";

6. Activity Code – Enter "552";

   Note: Based on the Activity Code "552," ERCS will automatically enter the MFT "PB" and the Source Code "99"

   ;

7. Statute Date – Enter applicable date (3 years from the date the related return was filed, unless an extension has been secured, then enter the extension date. If the penalty relates to a claim for refund, the statute date is 3 years from the date the claim was filed). The statute is extended for the appraiser using Form 872-AP;

8. Project Code – If the appraiser penalty case is related to a project, enter the appropriate project code;

9. Tracking Code – If the appraiser penalty case is related to a project with a unique tracking code, enter the appropriate tracking code;

10. Related Return Information - The return or claim for refund claimed the value of the property based on the appraisal; and

11. Group Managers will indicate approval for the appraiser penalty case by signing and dating this form.

(3) Form 5345-D is used for ERCS users. Non-ERCS users should use Form 5345-B, Examination Request Non-ERCS Users and complete the Form 5345-B in the same manner.

(4) Once managerial approval is secured, the examiner or attorney will distribute copies of Form 5345-D or Form 5345-B as follows:

1. Original – Remains in the penalty case file;

2. Group Copy – Retained in the group for control purposes.

(5) Examiner or attorney time charges for the specific IRC 6695A appraiser penalty case will be charged to the MFT PB record, which applies it to activity code (AC) 552 for the appraiser's TIN. Time charges cannot be charged directly to AC 552.

(6) After securing approval, the examiner or attorney should contact the appraiser using Letter 4477, Appraiser Appointment Letter, to schedule an audit appointment. The purpose of this meeting will be to gather sufficient facts to determine whether the appraiser can establish the value in the appraisal meets the "more likely than not" exception as provided in IRC 6695A(c).

(7) The IRS appraiser or valuation specialist may assist the examiner or attorney in preparing an Information Document request (IDR) to the subject appraiser requesting the basis for meeting the “more likely than not” exception.

(8) If the appraiser cannot establish the "more likely than not" exception applies, the examiner or attorney must propose an IRC 6695A penalty.

(9) Examiners and attorneys will make appropriate third party contacts to develop all facts relevant to the determination of the appropriateness of the penalty. IRM 4.11.57, Third Party Contacts, contains the procedures for third party contacts and guidance for examiners and attorneys making third party contacts (Letter 3164-P (DO), Third party notification for IRC 6700/6701 investigations, can be used for notification).

(10) If the examiner or attorney determines no penalty is warranted, Letter 4478, Appraiser Penalty No-Change Letter, will be prepared at the group level and left undated in the file. Technical Services will date and issue the letter if the case is selected for sample review; otherwise, the letter will be issued by Centralized Case Processing. (CCP). Form 3198 is used to alert CCP to issue Letter 4478.

(11) After consideration of all facts and circumstances, if the examiner or attorney determines an IRC 6695A penalty applies, the examiner or attorney will prepare Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, and Form 886-A, Explanation of Items, or its equivalent.

(12) Form 886-A, (or its equivalent), should include the following information:

1. The basis for asserting of the penalty,

2. Why the "more likely than not" statutory exception does not apply, and

3. The appraiser’s position regarding the penalty.

(13) The examiner or attorney will prepare Letter 4485, Appraiser Penalty Assessment Notification Letter. This letter will advise the appraiser of the proposed penalty, solicit payment, and provide an explanation of the dispute process. A copy of Form 886-A, Explanation of Items (or its equivalent) and other pertinent documents or workpapers should be included with this correspondence.

(1) Generally, examiners and attorneys should exercise discretion when referring an appraiser to the Office of Professional Responsibility (OPR) based upon an assessed IRC 6695A penalty. Discretionary referrals to OPR should be based on a pattern of conduct that is subject to IRC 6695A penalty. However, where there is a willful violation of IRC 6695A, a referral to OPR is mandatory. A referral to the SB/SE Lead Development Center (LDC) is mandatory when a penalty is asserted and the appraiser is not the subject of an open promoter investigation.

1. The Office of Professional Responsibility referrals – use Form 8484, Suspected Practitioner Misconduct Report. A copy of Form 886-A, Explanation of Items (or its equivalent), and other pertinent documents or workpapers should also be forwarded. Send the referral Form 8484 via secure e-mail to *OPR referrals.

2. SB/SE LDC – use the Form 14242. A copy of Form 886-A (or its equivalent) and other pertinent documents or workpapers should be included. Email the Form 14242 using secure e-mail to *LDC.

(2) Generally, an IRS appraiser or valuation specialist will recommend the IRC 6695A penalty to the examiner or attorney if a valuation issue meets the thresholds for a substantial or gross valuation misstatement as defined in IRC 6662(e), (g) and IRC 6662(h).

(1) Examiners and attorneys will attach Form 3198, Special Handling Notice for Examination Case Processing, to each penalty case file, identifying it as an IRC 6695A, appraiser penalty case.

(2) Examiners and attorneys will use the current version of Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, and will enter the following information:

1. Line 1 – Enter appraiser name;

2. Line 2 – Enter appraiser address;

3. Line 3 – Check applicable box;

4. Line 5 – Enter penalty case year;

5. Line 6 – Enter the appropriate statute date;

6. Line 7 – Enter the appraiser SSN or business EIN;

7. Line 8 – Check applicable function;

8. Line 9, page 1 column (c) and (d) – Enter the number of violations and the penalty amount (if no penalty is proposed, enter -0-);

9. Line 10 – Enter examiner or attorney signature (originator), the date Form 8278 was completed, organization code, and phone number and

10. Line 11 – Approver signature and date to indicate approval of the penalty. Both must sign the form in order for it to be valid. If not, the form will be returned to the originator for the signatures using Form 3210 procedures. Statute imminent Forms 8278 will be sent by FAX.

(3) Related Income Tax Workpapers - Include the first two pages of the related tax return, any schedules related to the understatement, and any relevant workpapers from the related file:

1. Copy of the original appraisal prepared by the appraiser;

2. Copy of the IRS Field Specialist Engineer’s and/or outside fee appraiser’s appraisal or appraisal review report;

3. Copy of the examiner's or attorney’s examination report;

4. Any documents, interview notes, or affidavits pertinent to the determination of the appraiser penalty; and

5. Any other additional information deemed warranted by the examiner, attorney, or manager.

(1) The case file will include the following:

1. Form 3198, Special Handling Notice, for Examination Case Processing;

2. Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, using the current version from the Electronic Publishing website;

3. Form 886-A, Explanation of Items, or its equivalent;

4. Form 4318, Examination Workpaper Index, used by field examiners or Form 4700, Examination Workpapers used by Tax Auditors;

5. Form 9984, Examining Officers Activity Record;

6. Form 5345-D, Examination Request - ERCS (Examination Returns Control System) Users, or Form 5345-B, Examination Request Non-ERCS Users;

7. Copies of all correspondence to and from the appraiser;

8. Documentation of the appraiser interview(s);

9. Taxpayer and other third party contact interviews and affidavits;

10. Copy of relevant work papers as described in item 3 above (see IRM 20.1.12.8);

11. Copy of Form 8484, Suspected Practitioner Misconduct Report; and

12. Copy of the Form 14242, Reporting Abusive Tax Promotions and/or Promoters, (if applicable).

(1) IRC 6695A penalties have post-assessment (but prepayment) penalty appeal rights.

(2) An appraiser may file a claim for refund utilizing Form 843, Claim for Refund and Request for Abatement. If the claim is denied and the appraiser has not had post-assessment Appeals consideration, administrative appeal rights will be granted by the Area or Campus. Appeals will consider only reasons for disagreement that come within the scope of the tax laws; it will not consider moral, religious, political, constitutional, conscientious, or similar grounds. See the Statement of Procedural Rules at 26 CFR 601.106(b).

(3) If the penalty has been paid in full, the appraiser may bring a refund suit in either the U.S. Court of Federal Claims or in a district court (1) immediately upon denial of the claim or (2) upon the expiration of six months from the date of filing the claim, if the Service has not acted in time. The appraiser’s refund suit must be within two years of the date of the mailing by certified mail or registered mail of the notice of disallowance.

(1) The IRC 6695A appraiser penalty case is not established or controlled on AIMS. The case must be established on ERCS prior to closing to Centralized Case Processing (CCP).

(2) An IRC 6695A appraiser penalty case will not be subject to mandatory review. Groups will close the case to the functional Centralized Case Processing Support following functional guidelines.

(3) An IRC 6695A appraiser penalty case will be assessed using Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties., This form is used by CCP to make the assessment. The assessments will be input to the Penalty Master File through IDRS using Command Code ADJ54, carrier Transaction Code (TC) 290 with a zero amount, penalty reference number (PRN) 581, and the amount of the penalty.

(4) A notice to the appraiser (generally, a CP 15) will be generated explaining the assessment and appeal rights.

(5) If a penalty is proposed, the case will be closed from the group via ERCS with Disposal Code "12" and updated to Status Code "51."

(6) If no penalty is proposed, the case will be closed from the group via ERCS with Disposal Code "02" and updated to Status Code "51."

(1) A pro forma Form 886-A, Explanation of Items, can be found at: https://portal.ds.irsnet.gov/sites/vl015/RelatedResources/Appraisers-Form%20886-A%20For%20IRC6695A.pdf