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Should I use a local 409a provider or is it okay going out of state?

Should I use a local 409a provider or is it okay going out of state if I have some compelling reason such as a)price, b)reputation or c)a direct referral?

Answers

Topic Expert
Jim Timmins
Title: Managing Director
Company: Teknos Associates
(Managing Director, Teknos Associates) |

It is important to obtain an independent appraisal to comply with the tax rules (IRC 409A) and the GAAP accounting rules (ASC 718 fka FAS 123R). However, the location of the firm providing the valuation work matters a lot less than the quality of the work.

Like with any professional service, it is nice to be able to meet face-to-face with your valuation provider at least once a year. (Unlike many professional service firms which charge by the hour and will bill for travel time to and from a meeting, most valuation firms work for a flat fee and will not charge separately for the meeting.) However, this is not absolutely essential to getting the work done because documents can be sent electronically and the management interview can be conducted over the phone.

It is more important to get the report done right and the IRS, SEC, and audit firms are increasingly focused on this issue. A couple of years ago, the IRS defined "qualified appraisal" and "qualified appraiser" for the first time. A "qualified appraiser" is an individual who has "earned an appraisal designation from a recognized professional appraiser organization for demonstrated competency in valuing the type of property being appraiser" or who meets defined education and experience requirements.

Some of the people and firms which rushed into the market to provide valuations after IRC 409A was first published do not meet these requirements. Be cautious about hiring an ex-CFO or ex-banker who has recently begun providing valuation services. Be equally cautious about hiring a valuation firm which performs the valuation work offshore. In neither of these cases will the people preparing the valuation report meet the IRS standard for "qualified appraiser" and this increases the likelihood of audit and potentially even penalty taxes down the road.

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