For income tax purposes, when claiming a charitable deduction for art or other collectibles valued at more than $5,000, the taxpayer must obtain a qualified appraisal to attach to a timely filed return. Failure to do so can result in the denial of the charitable deduction. Treas. Reg. § 1.170A-17.

An appraisal is considered "qualified" if (1) the appraisal is prepared by a qualified appraiser and (2) the appraisal reports contain certain required information. Treas. Reg. § 1.170A-17.

A qualified appraiser is an individual who meets certain educational and experiential requirements in connection with the type of property being appraised. The appraiser must regularly perform appraisals for which they are paid, but the fee charged cannot be based on a percentage of the appraised value. Lastly, a qualified appraiser cannot be an excluded individual, such as the owner of the donated property, the recipient charity, or a party to the original transaction. Treas. Reg. § 1.170A-17(b).

When engaging an appraiser, it is important to ask if they are willing to provide additional support in the event of an audit and have courtroom experience in case further work is needed. The IRS requests that an appraisal aligns with Uniform Standard of Professional Appraisal Practice ("USPAP") standards. Therefore, ideally, the engaged appraiser is USPAP certified.

Below is a general list of items in a qualified appraisal:

•Value of the artwork;

•Purpose of the appraisal (e.g., for income, gift or estate tax purposes);

•A professional quality color image of the artwork (and be sure to request electronic copies of the image, which may be needed if a return is selected on audit (see below));

•Name of the artist;

•Title of the artwork;

•Date of creation;

•Medium used;

•Dimensions;

•Provenance as well as any exhibition history and literature, such as the inclusion of the work in a catalogue raisonné;

•A list, image and description of comparable paintings, along with a narrative explaining the methodology used to value the work;

•A bio of each specialist used to appraise the artwork along with a certification signed by the appraiser affirming that the specialists used are qualified based upon their background, experience and education to render such a valuation;

•The appraiser's signature and the date, which should not be earlier than 60 days before the date of contribution.

For income tax returns, Form 8283 is required to report non-cash charitable contributions. This applies to all charitable donations of more than $500. This return is filed with the tax return for the year the taxpayer contributes the property and first claims a deduction and any carryover year.

Unlike a publicly traded security that has unlimited comparable sale data points of identical assets, valuing artwork is often a challenge due to limited comparable sales and the uniqueness of each artwork. Cutting corners by recycling a valuation prepared by an insurance company will not work, nor will an appraisal prepared for insurance purposes when an appraisal for income, gift, or estate tax purposes is needed. Finally, providing your own internet research as support will almost guarantee the denial of the charitable deduction. Play it safe and retain a qualified appraiser to prepare a qualified appraisal.

If an IRS agent contacts a taxpayer to review a claimed charitable deduction on a return, it is reasonable to assume that the agent, or someone in the agent's division, has already discussed the property with the IRS' in-house specialists. It may reasonably be anticipated that a work of art a taxpayer intends or has donated to charity may be reviewed by the IRS' Art Appraisal Services ("AAS") and, subsequently, the IRS' Art Advisory Panel (the "Panel"). Therefore, it is important to involve knowledgeable advisors to ensure that the appraised value submitted on an initial return to the IRS is not only defendable but anticipates how a group of industry experts might value that work.

(1) When selected. If such a return is selected for audit, with artwork or other collectibles with a reported value of $50,000 or more, IRS procedure necessitates that the case is referred to AAS for possible referral to the Panel.

(2) Who makes up AAS. AAS is the IRS' team of professional appraisers with a range of expertise who provide valuation advice and assistance internally at the IRS as well as externally to taxpayers and their advisors. In particular, AAS helps other divisions of the IRS, in particular regarding non-cash gifts to charity.

(3) What property they review. AAS provides valuation support for everything from fine art and decorative arts to collectibles. These items range from old master paintings and contemporary artwork to antiques, ceramics, textiles, carpets, silver, rare manuscripts, antiquities, ethnographic art, coins, and entertainment and historical objects. AAS helps review everything from Picassos to cultural objects, including Native American cultural objects, as well as sports memorabilia.

(4) What is the Art Advisory Panel. If AAS determines that the reported value of a work of art should be further evaluated, AAS refers the item to the Panel. The Panel consists of no more than 25 art experts from outside of the IRS. Panel meetings are closed-door session during which the value of various works are discussed. AAS provides support to the Panel, including gathering information regarding artists, sales data, comparisons to similar works, and, if available, private sales data.

The Panel does not receive information regarding the valuation submitted to the IRS on a return, the taxpayer, the appraiser who provided the initial value, or type of return on which a work is reported (meaning, income, estate, or gift tax). This is meant to provide an opportunity for the Panel to review a work without information that may cause potential bias.

The Panel only meets twice annually, so the review and, potentially, any re-review may be a drawn-out process. If a work is donated to a charity and the charity decides to sell the work, that sales data could undermine the taxpayer's position. If the taxpayer reports a charitable deduction on an income tax return of $1.5 million based on available sales data at the time of the gift, but the charity quickly sells the work for $1.1 million because it might need or want the cash value of the gift, the Panel might have access to that sales data. In such a case, that may undercut the taxpayer's position.

In general, the value of works referred to the Panel exceeds $150,000. During the 2022 fiscal year, the Panel reviewed 206 items on 44 taxpayer cases. The aggregate value of the works was approximately $316 million. The average value claimed for each item reviewed was $1,533,967. Based on the recommendations of the Panel, 31% of the reviewed items were determined to have a higher than reported value, 34% of the reviewed items a lower than reported value, and 35% of the reported values aligned with Panel recommendations.

Engaging an appropriate appraiser who can take potential IRS arguments into account and has experience defending appraisals against IRS challenges will help safeguard a taxpayer's position. A taxpayer generally can provide additional evidence to the Panel if they disagree with their findings. However, due to the Panel's schedule, a taxpayer who is willing to challenge a denial or reduction of a claimed charitable deduction may reasonably expect to wait, perhaps, two years to go through the process.

Collectors with charitable intentions often wish to benefit museums or other charities with their donations. Taking the time and care to plan not only allows collectors to maximize their donations from a tax perspective but also facilitates smoother transitions of works to recipient institutions. Cutting corners by either failing to submit qualified appraisals or anticipatorily working to head off challenges or objections can result in a partial or total loss of a charitable deduction.