What Percent Of Estate Valuations Are Not Accepted by the IRS?

The Internal Revenue Service (IRS) does not provide an official percentage of estate valuations that are not accepted. However, it is known that the IRS conducts estate tax audits to ensure that taxpayers are accurately reporting the value of their estates.

According to a report by the Treasury Inspector General for Tax Administration, the IRS examined approximately 8,600 estate tax returns in fiscal year 2019 and recommended adjustments to about 28% of them. This suggests that a significant percentage of estate valuations may not be fully accepted by the IRS.

It’s important to note that the reasons for adjustments can vary widely and may not necessarily indicate that the taxpayer intentionally underreported the value of their estate. In some cases, the adjustments may result from differences in the valuation methods used by the taxpayer and the IRS.

Why is an Estate Business Valuation Different From a "Normal" Business Valuation?

An estate business valuation can be different from a normal business valuation for several reasons:

• Purpose: The purpose of a business valuation for estate tax purposes is different from a normal business valuation. In estate planning, the valuation is used to determine the value of the decedent’s assets and liabilities for estate tax purposes, while in a normal business valuation, the valuation is typically used to determine the fair market value of a business for sale or merger.

• Timeframe: The timeframe for an estate business valuation may be different from a normal business valuation. In an estate business valuation, the valuation date is typically the date of the decedent’s death or an alternate valuation date that is six months after the date of death. This can result in differences in the valuation due to changes in the business’s financial performance and market conditions.

• Discounts and premiums: Discounts and premiums may be applied differently in an estate business valuation compared to a normal business valuation. In an estate business valuation, discounts for lack of control and lack of marketability may be applied to reflect the fact that the business interest being valued may not be marketable and may not provide the same level of control as a controlling interest. Additionally, premiums for control may be applied if the estate owns a controlling interest in the business.

• Tax laws: The tax laws governing estate taxes may result in differences in the valuation between an estate business valuation and a normal business valuation. For example, the estate tax laws may allow for certain deductions or exemptions that would not be available in a normal business valuation.

Overall, an estate business valuation takes into account the unique circumstances of the estate and the estate tax laws, which can result in differences from a normal business valuation.