Gift, Estate, & Income Tax Compliance

The IRS requires that gifts or transfers of privately held business interests be reported at fair market value. A qualified appraisal establishes this value objectively and defensibly. Without a professional valuation, taxpayers risk underreporting or overpaying taxes and may face IRS challenges, penalties, or audits. A defensible valuation supports compliance, enables accurate tax planning, and ensures equitable treatment among heirs or donees. Using a firm experienced in IRS-recognized valuation standards (such as USPAP and Revenue Ruling 59-60) provides confidence that your valuation will withstand scrutiny.

Fair market value, used for gift and estate tax compliance, is defined by the IRS as the price a willing buyer and seller would agree to, with neither under compulsion and both having reasonable knowledge of relevant facts. Fair value, in contrast, is often a statutory or financial reporting concept that excludes certain discounts or market factors. Using the correct standard of value is critical to ensure compliance. For tax purposes, the IRS explicitly requires fair market value, supported by defensible methods and proper documentation.

A qualified appraiser will request detailed financial statements (typically 3–5 years), organizational documents (such as operating agreements or shareholder agreements), ownership details, and recent transaction history. They’ll also gather industry, market, and company-specific data. The goal is to understand the company’s financial performance, structure, and market environment. Clear, complete data ensures a more efficient process and a more accurate result. Your valuation professional can provide a detailed request list at engagement.

Most valuations for tax compliance purposes take three to six weeks from the time all requested information is received. The timeline depends on the complexity of the business, the quality of available financial information, and the purpose of the valuation. Tight deadlines, such as filing or reporting requirements, can often be accommodated with prior coordination. It’s best to engage a valuation expert early in your estate planning or filing process to avoid last-minute stress and ensure timely, compliant reporting.

An IRS-qualified appraisal must be performed by a qualified appraiser, as defined under IRS regulations (Treas. Reg. §1.170A-13(c)(5)). This includes meeting educational, experiential, and credentialing requirements and following recognized standards such as USPAP (Uniform Standards of Professional Appraisal Practice). The report must clearly define the standard of value (fair market value), the effective date, the purpose of the valuation, and the methodologies used. Firms with extensive experience in tax-related valuations help ensure compliance and defensibility before the IRS.

The IRS can review valuation reports as part of a gift or estate tax audit. They may challenge valuations they believe are not well supported, inconsistent with market data, or prepared by unqualified appraisers. To minimize risk, a valuation should include transparent methods, well-documented assumptions, and appropriate discounts (if applicable). A firm experienced in IRS examinations can also assist in responding to inquiries or defending the valuation. The best defense is a thorough, well-documented, and independent appraisal.

A valuation is effective as of a specific date, reflecting the company’s value and market conditions at that point in time. For ongoing or recurring gifting programs (such as annual exclusion gifts), a new or updated valuation is usually required each year. Discuss your gifting plan with your appraiser to determine the most cost-efficient approach while maintaining IRS compliance.

Valuations for minority or non-controlling interests often include discounts for lack of control and lack of marketability. These reflect the reduced value associated with limited influence over company operations and the inability to readily sell ownership interests. The magnitude of these discounts depends on market data, empirical studies, and company-specific factors. Properly supported discounts are critical to defend valuations under IRS scrutiny while ensuring that reported values fairly reflect market realities.