Tax Season is over, are you ready for Audit Season?

What Companies Should Do After Tax Season for Valuation: An IRS-Compliant Guide

For companies operating in the U.S., the period following tax season presents a crucial opportunity to conduct or update business valuations under IRS requirements. Proper valuation supports regulatory compliance, strategic tax planning, and audit preparedness. It is essential for organizations to understand the IRS’s expectations and the valuation processes to be followed to minimize risks and maximize accuracy.

Importance of Post-Tax Season Valuation

After completing tax filings, companies have finalized financial statements and tax returns that provide an accurate snapshot of their financial health. This clarity enables effective business valuation, essential for:

· Ensuring compliance with IRS rules,

· Supporting reported tax positions and minimizing audit exposures,

· Planning for transfers of ownership, estates, and gifts,

· Assisting in financial reporting and strategic decision-making, and

· Preparing for upcoming IRS audits or other tax scrutiny.

A defensible valuation conducted in accordance with IRS standards is critical to prove that reported business values are reasonable and backed by sound methodology.

IRS Business Valuation Requirements

The IRS outlines business valuation principles and requirements primarily in the Internal Revenue Manual (IRM) 4.48.4 and Revenue Ruling 59-60. Some of the key points include:

· Fair Market Value (FMV): Defined by the IRS as the price at which a property would change hands between a willing buyer and seller with reasonable knowledge and no compulsion to buy or sell.

· Qualified Appraiser: The valuation must be performed by a qualified, independent appraiser with demonstrated experience and adherence to professional valuation standards.

· Comprehensive Documentation: Detailed valuation reports must document methods used, assumptions, financial data, and rationale for value conclusions.

· Valuation Approaches Accepted by the IRS:

o Asset-Based Approach: Valuing the company based on net assets.

o Income Approach: Discounting future expected cash flows to the present value.

o Market Approach: Comparing to similar companies or transactions in the market.

Appraisers often use multiple approaches to provide a comprehensive valuation opinion and reconcile differing conclusions.

Steps Companies Should Take After Tax Season for Valuation

Following IRS guidelines ensures valuations are defensible and comply with tax laws. Companies should undertake the following steps post-tax season:

1. Review Final Tax Returns and Financial Statements

Begin by thoroughly reviewing finalized tax filings and financial records. These documents are foundational inputs that reflect the economic reality of the business during the valuation period.

2. Define the Purpose of the Valuation

Different purposes may require different valuation standards or reports. Common reasons include:

· Estate and gift tax liability calculations,

· Business sale or transfer considerations,

· Support for buy-sell agreements,

· Charitable donations of business interests,

· Preparing for IRS audits.

Clarifying the purpose ensures the valuation report meets all IRS disclosure requirements.

3. Engage a Qualified Appraiser

Hire an appraiser who meets the IRS definition of qualified and follows recognized valuation standards such as those from the American Society of Appraisers (ASA) or the American Institute of Certified Public Accountants (AICPA). The appraiser will:

· Analyze historical financials (3-5 years),

· Examine tax returns and operational data,

· Assess relevant industry and economic factors,

· Utilize appropriate valuation methodologies.

4. Provide Complete and Accurate Data

Companies must supply comprehensive, accurate data to appraisers to avoid under or overvaluation. This includes financial statements, asset and liability schedules, contracts, business plans, forecasts, and previous valuation reports.

5. Select Appropriate Valuation Methodologies

The appraiser will select one or more of the asset, income, or market approaches based on the company’s nature and use case. The report will justify the selection and discuss assumptions in detail.

6. Obtain and Review the Valuation Report

Upon completion, management should review the detailed valuation report to understand methodology, assumptions, and conclusions fully. The report serves as critical backup in complying with IRS rules and defending value in audits.

7. Incorporate Valuation for Tax Planning

Use the valuation insights for tax planning strategies such as:

· Establishing fair values for equity transfers to avoid gift tax penalties,

· Assisting in calculating estate tax obligations,

· Supporting corporate restructuring or mergers,

· Planning deferred tax liabilities and gains recognition.

Valuation Types Required During IRS Audit Season (Busy Season)

During IRS audits or peak tax periods, specific valuation types are required to substantiate tax filings and disclosures:

Fair Market Value (FMV) Valuation

FMV valuations are the backbone of IRS tax compliance on business ownership transfers, estate and gift tax filings, and charitable contributions. This valuation estimates what a willing buyer would pay a willing seller in an arm’s-length transaction.

Section 409A Valuation

Section 409A valuations are mandated for private companies issuing stock options. They establish the FMV of common stock to comply with IRS deferred compensation rules and avoid harsh tax penalties.

Transfer Pricing Valuation

Multinational corporations must conduct transfer pricing valuations to price intercompany transactions fairly and comply with IRS transfer pricing audits and documentation requirements.

Inventory and Asset Valuation

IRS guidelines require accurate valuation of inventory and fixed assets for year-end tax reporting to determine taxable income accurately, influencing cost of goods sold and depreciation.

Valuation for Income Tax Audits

Under certain circumstances, the IRS requests valuations during income tax audits to confirm that asset values, stock ownership interest valuations, or transaction amounts reported on tax returns are reasonable and comply with tax law.

Preparing for IRS Valuation-Related Audits

Understanding audit risks and IRS expectations facilitates effective preparation. The IRS typically:

· Audits tax returns within three years of filing,

· Focuses on valuations with significant discrepancies or poor documentation,

· Requires detailed reporting of assumptions and methodologies,

· Could extend statute of limitations if valuation disclosure is insufficient.

Maintaining IRS-compliant valuation reports with professional standards helps prevent prolonged audits, penalties, and excessive interest charges.

Conclusion

For businesses in the U.S., post-tax season is the best opportunity to conduct or update business valuations following IRS guidelines. Accurate, well-documented valuations reduce the risk of IRS tax disputes and provide a solid foundation for estate, gift, and tax planning.

Companies should engage qualified valuation experts, provide complete documentation, and ensure valuations adhere to IRS-accepted methodologies. During audit seasons, specific valuations such as FMV, 409A, and transfer pricing are critical for tax compliance and minimizing audit risk.

Proactively managing valuation activities aligned with IRS standards promotes transparency, regulatory adherence, and sound financial governance, ensuring companies are well-prepared for tax seasons and audits ahead

abhi.yadav@whitecrownconsulting.com