As tax season nears, taxpayers may be interested to learn that the Internal Revenue Service enlists an Art Advisory Panel—a team of prominent art scholars, dealers, and curators—to make recommendations regarding the value of works of art involved in income, estate, and gift tax returns.

The IRS’s Art Advisory Panel works with the Art Appraisal Services (AAS) unit in the Office of Appeals.  When the IRS has selected for auditing a tax return including an appraisal of any single artwork or piece of cultural property valued at $50,000 or more, the local IRS office must refer the case to AAS, which in turn can then refer it to the Art Advisory Panel.  The Panel helps the IRS review the taxpayer-submitted appraisals of the work’s fair market value, to ensure that the taxpayer is paying the appropriate amount of income, estate, or gift tax.

The AAS has its own in-house appraisers who review appraisals by researching publicly available information; the Panel, however, is made up of more than a dozen prominent gallery directors, museum curators, and art scholars from some highly respected art institutions—from the Winterthur Museum to the Acquavella Galleries.  The Panel is thus able to provide the IRS with insight drawn from extensive experience in the industry.  According to the IRS website, Panel members do not receive compensation.

When reviewing a work, Panelists are not told the taxpayer’s name or the type of tax and the tax consequences that may be at stake. There is also a recusal process for any Panelist who may have a conflict of interest for a particular work.  Panelists receive photographs of the work and information drawn from the taxpayer’s appraisal, including provenance and condition, as well as information gathered by the AAS’s own appraisers.  The Panel meets periodically (they met twice in 2012) to confer about the value of the works in question.

The Panel’s most recent annual report gives a sense of the high stakes.  In 2012, the Panel reviewed 444 items worth over $280 million (according to taxpayer valuations).  Remarkably, all these items came from just 43 taxpayer cases.  Thus, for those taxpayers, the Panel’s recommendations could have weighty tax implications.  The Panel’s recommendations are advisory, and subject to AAS’s review and concurrence, but in practice they hold considerable sway—in 2012, AAS fully adopted 96.5% of the Panel’s recommendations, and partially adopted the rest.  The Panel recommended accepting 51% of the appraisals it reviewed in 2012, and recommended adjustments to the remaining 49%.

In a recent column for Forbes, Peter Reilly (a CPA and Managing Director of Private Wealth Services for Grant Thornton) observes that taxpayers donating works to charity generally benefit from a higher appraisal, while those facing estate or gift taxes generally benefit from a lower appraised value.  Reilly’s column spotlights the need for collectors who are considering donating, bequeathing or gifting a work of art to seek both legal advice and skilled appraisals to clarify the tax consequences of such decisions.  It also brings attention to the special challenges involved in art valuation, and in particular, the unique role of the Art Advisory Panel in relation to the IRS, taxpayers, and the art community.