If you have ever donated a horse to a college equestrian team, therapeutic riding program or other 501(c)(3) charitable organization, you may be aware that the Internal Revenue Service requires an appraisal report to be completed if you plan to claim the value of the horse at $5,000 or more. However, many horse owners learn the hard way that, if the appraisal report was not completed properly or by an appraiser with appropriate credentials, they can find themselves at the receiving end of a denied charitable donation or involved in an IRS appeal. Here’s what you need to know to avoid any future taxpayer headaches.

Valuation Issues

As an equine appraiser, I’m frequently asked to complete appraisals for IRS charitable donations. I am also asked to consult with horse owners who are navigating the IRS appeals process when their previously hired appraiser is unwilling to help once the threat of an appeal is looming. 

Appraisal reports for IRS charitable donations can be reviewed, audited and denied for a variety of reasons. Here is a breakdown of some of the issues to be aware of:

• Always attach the appraisal report to your tax return, as you are less likely to be audited if this step has been completed.
• The IRS frequently reviews appraisals for personal property, which includes horses, if the value of the property is over $150,000. Other tax returns may be audited but are randomly chosen. 
• Appraisal reports that are only one or two pages, do not include appraisal methodology, no justification for the value, or the IRS deems were completed by someone who does not perform appraisals regularly are more likely to be audited than a properly written report completed by a credentialed and experienced appraiser.
• An appraisal report that is completed with the intention of grossly inflating the value of a horse is a red flag to the IRS and normally results in an audit. It is important to note that falsely or fraudulently overstating the value of property is considered tax fraud. Doing so may result in the IRS completing their own appraisal to determine the value of the property. It is important to understand that the IRS has its own in-house appraisers who are properly licensed and trained in appraisal methodology and procedures. If there is a discrepancy in value between the taxpayer’s appraiser and the IRS appraiser, the IRS has the right to decide the correct valuation.
• If the IRS determines an appraiser’s valuation is grossly under- or overvalued, the owner of the property may be subject to penalties up to 40% of the stated valuation. As well, the appraiser may be forced to pay a penalty of 125% of the gross income received from the completion of the appraisal report, subject to a civil penalty, and may be denied the ability to complete IRS charitable donation appraisals in the future.

As a result of some of the issues mentioned above, new regulations for IRS charitable donations were established in 2019. The IRS now requires appraisals to be “qualified appraisals” and be completed by a “qualified appraiser.” But what exactly does that mean?

A “qualified appraiser” is a paid professional—someone who does this job regularly—who has earned an appraisal designation from a recognized professional appraiser organization. This designation is awarded based on demonstrated competence in valuing the type of property for which the appraisal is performed. Alternately, the appraiser must have successfully completed professional or college-level coursework in valuing the type of property and has two or more years of experience in valuing the type of property being appraised. (Read on for more information about choosing the most qualified appraiser for the job.) 

A “qualified appraisal” includes a standard set of information required by the IRS. 

Qualified Appraisal

In order to be considered a “qualified appraisal,” the IRS requires an appraiser to include in their report information including a full description of the horse, any agreement terms between the donor and the nonprofit receiving the horse, the effective date of the valuation (normally the date of donation), the horse’s fair market value, comparable sales transactions and the appraiser’s credentials. Some appraisers forget to include the additional information below, which can trigger an IRS review:

• date of contribution to the non-profit organization,
• IRS charitable donation declaration by the appraiser,
• a statement that the appraisal was prepared for income tax purposes, and
• the method of valuation used to determine the fair market value, such as the sales comparison approach.

It is also important to note that a qualified appraisal must be signed and dated by the qualified appraiser no earlier than 60 days before the date of the contribution. Click here for all the details about what the IRS requires in a qualified appraisal.  

Covering Your Bases

How can you help protect your equine charitable donations going forward? Make sure you have done your due diligence and ensure the person you hire is either an accredited or senior appraiser with the American Society of Equine Appraisers, has experience completing IRS equine charitable donation appraisals, and is not only up to date on the current IRS regulations but also writes appraisal reports that are Uniform Standards of Professional Appraisal Practice-compliant. There are no mandatory continuing education requirements for these appraisers, as all continuing education is done on a strictly volunteer basis, so it is important to ask your appraiser whether they’ve completed such courses.

Retaining the services of an appraiser who is an accredited or senior/certified member of organizations such as the International Society of Appraisers and American Society of Appraisers allows a horse owner to go one step further in ensuring their appraisal report is completed properly. These organizations require their members to re-certify every five years and attend a mandatory USPAP course every two years. They also provide their members with the latest IRS updates and procedures. 

What to do if you find yourself in a situation in which the IRS has denied your equine charitable donation due to not being compliant with the above regulations? Contact an equine attorney who has experience navigating through the IRS appeals process. They may also be able to help you retain the services of a knowledgeable equine appraiser who can complete an IRS-compliant equine charitable donation appraisal report to help back up your case.

Tracy Dopko is a senior equine appraiser with Daventry Appraisal Services, considered one of the world’s leading equine appraisers and equine expert witness firms. She is hired globally to conduct appraisals and testify as an equine expert witness and has been in practice for over 25 years.