Business Valuation Penalties

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You may need to get a business valuation for any number of tax reasons. You may make a charitable gift of stock, for example, or your heirs may have to get a valuation for estate-tax purposes. And you may have the urge to overvalue in the case of the charitable gift, or your heirs to undervalue in the case of a large estate. If you act on that urge, the IRS is well prepared to inflict heavy penalties.

If, for example, your income-tax bill is underpaid by $1,000 or more because of an incorrect valuation, you can be penalized. The penalties apply when your valuation is off by 150% or more from the IRS's determination. For charitable deductions, the penalty is 30% of the tax underpayment. For example, if the IRS determines that you owe an additional $2,000 in taxes after a downward adjustment of closely held stock claimed as a contribution deduction, the penalty is $600 (30% of $2,000).

For property other than charitable deductions, the penalties are as follows: Ratio of claimed Penalty on

valuation to additional

correct valuation tax due

150% to 200% 10%

201% to 250% 20%

251% + 30%