Why the IRS May Reject a Standard Bank Appraisal

One of the most common misunderstandings I encounter involves the assumption that all appraisal reports are essentially the same. In reality, the type of appraisal report required often depends entirely on the intended use of the assignment.

Many appraisers primarily perform lending-related work for banks and mortgage companies. Those assignments are commonly completed using standardized lending forms developed specifically for residential financing transactions.

However, when an appraisal is needed for estate planning, gifting, date-of-death valuation, litigation, or IRS-related matters, the reporting requirements are often very different.

In many IRS-related assignments, a standard lending form appraisal may not be sufficient. The IRS generally expects a narrative appraisal report developed in compliance with USPAP standards and based on the definition of fair market value.

Over the years, I have worked on assignments involving estates, trusts, tax matters, retrospective valuations, litigation support, and complex valuation issues throughout California. One of the reasons I often explain these reporting differences to clients is because selecting the wrong type of appraisal report can create unnecessary complications later.

Why Many Appraisers Default to Lending Forms

Most residential appraisers perform a significant amount of work for lenders. In those situations, the appraisal is typically prepared on a standardized form designed for mortgage underwriting purposes.

These reports are generally concise and highly structured because the intended user is usually a bank or lending institution.

For mortgage lending purposes, that format may be entirely appropriate.

However, IRS-related assignments often involve very different requirements and intended users, including:

• Attorneys
• CPAs
• Trustees
• Estate representatives
• Government agencies
• The IRS
• Courts and litigation matters

These types of assignments typically require expanded analysis, explanation, documentation, and reporting that go beyond what is commonly included in a standard lending appraisal form.

What the IRS Typically Requires

For many estate and tax-related assignments, the IRS generally expects a narrative appraisal report developed using the definition of fair market value.

This differs from many lending assignments where the reporting format and valuation requirements may be tailored specifically for mortgage underwriting purposes.

A narrative appraisal report commonly includes:

• Detailed market analysis
• Expanded property descriptions
• Highest and best use analysis
• Comparable sales analysis
• Supporting market data
• Valuation methodology explanation
• USPAP certifications and disclosures
• Additional narrative discussion related to the assignment

The purpose of a narrative report is to fully explain the reasoning, data, and methodology supporting the value conclusion.

These types of reports are commonly associated with assignments such as:

• IRS Date of Death Appraisals
• IRS Estate Planning Appraisals
• IRS Estate & Gifting Appraisals
• Expert Witness & Litigation Support
• Real Estate Appraisal Reviews

Fair Market Value vs. Market Value

Another important distinction involves the definition of value being used in the assignment.

Many people assume the terms “market value” and “fair market value” mean exactly the same thing. In practice, however, the applicable definition of value depends on the intended use of the appraisal assignment.

For many IRS-related matters, the applicable standard is fair market value.

Generally speaking, fair market value considers the price at which a property would change hands between a willing buyer and a willing seller, with neither party being under undue pressure and both parties having reasonable knowledge of relevant facts.

While these distinctions may appear subtle, they can become very important in estate, tax, litigation, and retrospective valuation assignments.

What Is a Narrative Appraisal Report?

A narrative appraisal report is a more comprehensive reporting format commonly used for legal, tax, estate, and complex valuation matters.

Unlike a standardized lending form, a narrative report allows the appraiser to fully explain:

• The valuation process
• Market conditions
• Property-specific factors
• Relevant legal or economic considerations
• Income analysis where applicable
• The reasoning behind adjustments and conclusions

These reports are often reviewed by attorneys, accountants, trustees, courts, government agencies, and the IRS. As a result, the level of explanation and documentation is typically far more extensive than what is required for a standard mortgage lending assignment.

What Is a Restricted Appraisal Report?

Under USPAP, appraisers may also prepare what is known as a Restricted Appraisal Report.

Historically, restricted appraisal reports were intended for limited use by a specifically identified client. Although USPAP reporting terminology has evolved over time, the term “restricted appraisal report” is still commonly used within the appraisal profession.

Depending on the assignment, a restricted appraisal report may range from a concise letter-style valuation to a report containing less detail than a full narrative appraisal report.

Whether a restricted appraisal report is appropriate depends entirely on the intended use, intended users, and specific requirements of the assignment.

Common Situations Where Narrative IRS Appraisals May Be Needed

Over the years, I have seen narrative appraisal reports commonly required for:

• Estate tax reporting
• Inherited property valuations
• Date-of-death valuations
• Trust administration
• Gifting purposes
• Partnership dissolution matters
• Divorce litigation
• Property tax disputes
• Retrospective valuation assignments
• Expert witness and litigation support

These assignments often involve legal, financial, or tax-related decisions where the quality and credibility of the appraisal report become especially important.

Questions You Should Ask Before Hiring an Appraiser for IRS-Related Work

If you are hiring an appraiser for an estate, tax, or legal matter, I believe it is important to ask a few key questions before moving forward:

• Do you regularly perform IRS-related appraisal assignments?
• Will the report be prepared as a narrative appraisal?
• Is the appraisal based on fair market value?
• Do you have experience with retrospective valuations?
• Have you worked with attorneys, CPAs, or trustees?
• Is the report USPAP compliant?

These questions can help avoid situations where the wrong report format is prepared for the intended use of the assignment.

Work Directly With an Experienced California Appraiser

At Collins & Associates, I personally complete appraisal assignments involving estate, IRS, legal, tax, and complex valuation matters throughout Southern California.

My experience includes:

• Estate and trust valuations
• Date-of-death appraisals
• Property tax appeal appraisals
• Expert witness and litigation support
• Commercial and residential valuation assignments
• Complex and specialty property appraisals

If you need an appraisal for an IRS-related matter, legal proceeding, or estate planning purpose, understanding the proper reporting format and valuation requirements can make a significant difference.

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