Clifford, a qualified appraiser of fine art and other collectibles, was advising

Question

Clifford, a qualified appraiser of fine art and other collectibles, was advising Sarah when she was determining the amount of the charitable contribution deduction for a gift of a sculpture to a museum. Clifford sanctioned a $900,000 appraisal, even though he knew the market value of the piece was only $300,000. Sarah assured Clifford that she had never been audited by the IRS even though she regularly donated artworks, so the risk of the government questioning his appraisal was negligible.

But Sarah was wrong, and her return was audited. The IRS used its own appraisers to set the value of the sculpture at $400,000. Sarah is in the 33% Federal income tax bracket, while Clifford’s fee for preparing the appraisal was $20,000.

a. Compute the penalty the IRS can assess against Clifford. (Don not consider the valuation penalty as to Sarah’s return.)

b. What is the penalty if Clifford’s appraisal fee was $7,500, not $20,000?

c. Construct an Excel formula that would generate the correct answer for parts (a) and (b).

Explanation / Answer

The guidelines for the penalty are - penalty will be lesser of the following:

In this case, Sarah is in 33% tax bracket. Now the penalty will be lower of :

As per above the penalty shall be $16500 for the appraiser.

However, if Clifford's fee was only $7500, the penalty calculation will be lower of :

In this case the penalty will be based upon appraiser fee at only $ 9375.

The excel formula to generate the penalty amount shall be :

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