Sunday, March 02, 2008

Bogus Art

The Los Angeles Times has a story this morning about the revenue loss to the Treasury from overvalued donations of works of art:

An alleged tax-fraud scheme involving donations of overvalued art to four local museums is part of a larger, unchecked problem with inflated art appraisals that has cost the federal government untold millions, a Times analysis has found.

Each year, the Internal Revenue Service audits donations claimed on only a handful of the 100,000 or more tax returns that allow art donors to reap nearly $1 billion in tax write-offs. Half of the donations checked over the last 20 years had been appraised at nearly double their actual value.

The crux of the public policy problem is the infrequency with which appraisals are checked. It makes all other remedies less effective:

A 2006 law tightened standards and increased penalties on bad appraisals. For donors, it lowered the threshold on what the law considers a bloated appraisal, from 200% overvalue to 150%. It also increased oversight of and fines for appraisers. But because the IRS checks so few appraisals, some believe that overvaluations will continue.
This is not a hard problem to solve. Every significant donation should have its appraisal checked by the IRS, and the donor should bear the cost of that process, not the government. There would be fewer small donations of art, but for major pieces, this cost of checking the appraisal would be small relative to the value of the tax deduction.


A Red Mind in a Blue State said...

I think a similar concern was expressed about donated autos.

I wonder if anyone has ever studied the amount of gross receipts claimed by charities and churches and compared that number to the amounts claimed as deductions. I'm going to guess that the amounts on the tax returns greatly exceed the actual giving.

Anonymous said...

Yet another tax break for the rich.

How convenient.

Ironman said...

Red Mind: Having gone through the vehicle donation process, I can vouch that the valuation issue between donor tax return and charity realized donation value isn't that far out-of-whack.

Donated vehicles are valued on tax returns according to their Kelly Blue Book value - charities actually do realize somewhere around that (while a donated clunker may not be fully worth its KBB value, the sum of its parts may be worth quite a bit more than that.)

The main difference between art donations and car donations goes to the volumes of the respective markets. The market for original works of art is far thinner and the volumes are much, much less than that for cars, so there's a real lack of ability for a solid market assessment of a work of art's value.

Rather than increasing the amount of bureaucracy and wasteful activity associated with assessing the value of artwork donated to museums, a better approach would be to require the donor to guarantee the value of their artwork donation by posting a bond to pay the cash difference between the value they declare for the work and the value of the work that's assessed by recipient of the charitable donation.

That way, it's win-win all around. There's no question on the government side on the amount of the donation so no taxes are avoided and the costs of enforcement are minimized, the donor gets the full dollar value of their donation on their taxes and the museum gets its full cut too - all because everyone now has an incentive to put the right valuation on the donated artwork.

Independent Accountant said...

This is another IRS red herring. I've been a CPA too long. $1 billion. Peanuts. Let the IRS worry about tax shelters peddled by large law and accounting firms and investment banks. As Everett Dirksen said in 1964, "A billion here. A billion there. Sooner or later you start talking about some real money". This donor stuff is a diversion.

Paul said...

"Every significant donation should have its appraisal checked by the IRS, and the donor should bear the cost of that process, not the government."

I would disagree. You do not need to check every donation, just a larger number of donations than what they are checking now. Also, the donor should only bear the cost IF the donated artwork is overvalued.

Lord said...

I just don't think art appraisal is in any sense an objective science, so I doubt there is much to be gained by it.