Business Valuations in Estate Tax Returns – Avoiding Audit Triggers

Benjamin Franklin advised, “An ounce of prevention is worth a pound of cure.” And an estate tax audit is a potentially costly circumstance to be prevented if possible. When incorporating a business valuation in an estate tax filing, there are preventive measures to reduce the risk of audit selection.

Tips for avoiding audit triggers:

  • Discount conservatively.  If the valuation contains marketability and control discounts (as most do), the discounts should be within reason, and the report should provide support as to why the discount figures are appropriate. This will require reference to market data, and often some restraint on the part of the valuator.
  • Support method choices.  The valuation should discuss the different methodologies that are available to perform the appraisal and, where appropriate, explain why the chosen method is more appropriate than others.
  • Appearances matter.  An appraisal report should give a positive first impression to the Service and convey the message that the substance of the report, like its appearance, was carefully and meticulously prepared by professionals.
  • Demonstrate a realistic value.  The value must be demonstrably consistent with the realities of the market and the economy, using evidence from market transactions, bank lending requirements, and reports from market participants.
  • Use an expert.  The IRS requires that a valuation be prepared by an accredited valuation analyst with the expertise and experience necessary to evaluate the business with respect to its industry.

BEAR, founded in 1986, is a business valuation firm working through a nationwide network of valuation experts, CPAs, business brokers, and consultants. Among our staff we have the major valuation credentials, including ASA, CPA/ABV, CVA, CFA, and MVS.