The IRS requires property transferred by gift or to charity to be reported at fair market value (FMV)—generally, “the price that property would sell for on the open market… between a willing buyer and a willing seller” with neither compelled to act and both informed of relevant facts. Guidance in IRS Publication 561 is the primary source for determining FMV of donated property and explains the documentation taxpayers must maintain to substantiate deductions.
Enforcement pressure has been rising across valuation-sensitive areas. The accuracy‑related penalty under Code Sec. 6662 is typically 20% of the portion of tax underpaid due to negligence, substantial understatement, or valuation misstatements, and increases to 40% for gross valuation misstatements in defined circumstances. Regulations under 26 CFR § 1.6662‑2 outline how these penalties apply and bar “stacking” multiple accuracy‑related components on the same underpayment.
For payroll practitioners, valuation rigor extends to noncash fringe benefits (e.g., vehicles, housing, club memberships) and equity-based pay. The IRS’s Publication 15‑B reiterates that fringe benefits are generally taxable at FMV unless a specific exclusion applies, and details valuation methods—such as the cents‑per‑mile, annual lease value, and commuting rules—for employer-provided vehicles.
Subject-matter experts: credible, defensible valuations are essential
Duncan Campbell, Baker Tilly’s individual tax leader, emphasized the stakes of getting it right: “Valuation is essential because it determines the value of a gift, which affects the lifetime exclusion for the person giving away property. Accurate valuation helps protect family wealth, reduces exposure to estate taxes, and prevents future disagreements. If the value is incorrectly assessed at the time of gifting, some property might be mistakenly included in an individual’s estate later, leading to potential losses of up to 40% due to estate taxes.”
He also noted that some asset classes demand specialized expertise: “Asset classes that require specialized valuation or expert assessment include artwork, fine wines, car collections, and rare collectibles… art represents a unique asset class that necessitates qualified appraisers with specialized expertise; such professionals are relatively scarce.” By contrast, real estate benefits from wider availability of certified appraisers and objective comparables.
Kim Wylam, Baker Tilly’s managing principal of the human capital consulting practice, pointed to established rules for equity-based pay: “For stock options, the value must be set at or above the fair market value of the stock on the date it’s granted. If not, the award falls under Code Sec. 409A, which adds extra tax obligations… RSUs are typically taxed when they vest, and shares are delivered. If delivery is delayed, the RSU plan needs to comply with 409A… Having proper documentation on how the value was determined is key.” She added that “the IRS provides ‘safe harbor’ provisions for private companies” when a qualified independent appraiser uses a reasonable method.
Equity compensation: 409A compliance, ASC 718 measurement
When stock options are granted below FMV, they typically lose the exemption and must comply with Code Sec. 409A, exposing employees to immediate income inclusion, a 20% additional tax, and interest. The IRS’s Audit Technique Guide for nonqualified deferred compensation lays out the framework for timing of income and common pitfalls; practitioner resources summarize that a single failure can trigger broad inclusion and penalties.
For financial reporting, FASB ASC Topic 718 requires companies to measure share‑based awards at fair value on the grant date and expense them over the vesting period, often using option‑pricing models (e.g., Black‑Scholes, lattice).
Valuation specialists and auditors also look to the AICPA’s Accounting and Valuation Guide for privately held company equity issued as compensation—currently undergoing draft updates to better align with ASC 820 fair‑value principles and incorporate market‑based inputs from secondary transactions.
Wylam underscored these standards: “For financial reporting, companies must measure share‑based awards at fair value on the grant date and expense them over the vesting period… [and] the AICPA Valuation Guide… provides best practices for applying ASC 820 fair value principles and calibrating valuations to market transaction.”
Fringe benefits and employee awards: FMV and de minimis limits
The IRS expects fringe benefits to be reported at FMV, not employer cost. Publication 15‑B details valuation methods for company cars and sets annual limits for qualified transportation benefits; it also reiterates that exclusions such as de minimis benefits are narrowly defined. Notably, gift cards are taxable wages and do not qualify as de minimis, regardless of amount.
Wylam cautioned on common errors: “Treating gift cards as non‑taxable. They are always taxable… Using the employer’s purchase cost instead of the fair market value… Misclassifying frequent or higher‑value items as de minimis.” She added: “All cash and cash equivalent payments are required to be reported on the W‑2 regardless of value.”
Audit risk and penalties: documentation gaps widen exposure
Payroll audits increasingly target executive compensation and fringe benefits, aided by modern IRS data analytics. Practitioner briefings advise employers to shore up recordkeeping—including contemporaneous logs for vehicles and clear FMV support—because undervaluation and misreporting can lead to assessments, penalties, and broader audit scope.
Wylam noted the cascading risk: “If compensation is undervalued or not reported correctly, it can lead to underreported income. This increases audit risk and can result in tax assessments, penalties, and interest. Once an issue is identified, auditors often review related areas like fringe benefits or executive pay. One valuation error can lead to a much broader audit.”
IRS Valuation Trends and Impact on Payroll Compliance
Payroll professionals face a shifting compliance landscape as the IRS intensifies its focus on executive benefits, non-cash compensation, and valuation standards. The One Big Beautiful Bill Act (OBBBA, P.L. 119-21) has brought a major change: it permanently eliminates the exclusion for employer-reimbursed moving expenses for most employees, except for active-duty military and certain intelligence community members. This means the temporary suspension under the Tax Cuts and Jobs Act (TCJA) will not revert after 2025, and payroll teams must update their processes to reflect this permanent change.
At the same time, the IRS is leveraging advanced data analytics to compare payroll filings with other tax returns, increasing the likelihood of follow-up inquiries when discrepancies arise. Digital asset (crypto) compensation is also under growing scrutiny, with expectations of more formal IRS rules and guidance in the near future. Valuation analysts are watching for increased IRS attention to 409A valuations and possible updates to fringe benefit valuation tables.
As Wylam explains, “There’s more focus on compliance around executive benefits and non-cash compensation. IRS systems are being used to compare payroll data with other filings. Mismatches can trigger follow-up.” Staying current with IRS developments and maintaining thorough documentation and consistent valuation practices are essential steps for payroll and tax professionals to ensure compliance and minimize risk.
Best practices: building defensible valuations
Both experts emphasized process discipline. Campbell’s guidance for gifts centers on credible appraisals and specialized expertise for hard‑to‑value assets (e.g., art, collectibles). Wylam urged payroll teams to use IRS valuation methods where available, rely on independent 409A appraisals for private stock, document assumptions and inputs, and apply consistent methodologies: “Supporting records should be saved with payroll documentation.”
The experts stressed that valuation should not just be considered a back‑office detail but a front‑line topic with potential compliance risk. With penalties under Code Sec. 6662, 409A consequences, and closer audit attention, defensible FMV—accurately measured, consistently applied, and thoroughly documented—has become a critical control across gifting, fringe benefits, and equity compensation.
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