Art is exceedingly difficult to appraise. Because of the uniqueness of each individual piece of art appraisers can have trouble finding comparable pieces. This can make it difficult to come up with a good estimate of a piece's value.
At auction art often sells for much more or much less than previous appraisals. Different appraisers often come up with widely divergent appraisal values.
As Barron's discusses in "How Art Can Blow Apart Your Estate," this can cause big problems for estates that include valuable artwork.
The IRS has a special division that assesses the value of any piece of art initially valued over $50,000. If the estate submits a value lower than what the IRS eventually decides the art is worth, the estate can receive an unexpectedly large estate tax bill, which will include fees and penalties.
Individuals who donate art to charity can also be assessed fees and penalties if they over value the art they donate and take a charitable deduction on their taxes. In recent years the IRS has adjusted the value of approximately 40% of the art pieces it has considered.
Consequently, people who have art collections need to take extra precautions. They should get more than one appraisal of the art so they can get a better estimate of the value. Estate plans should also contain some contingencies in case the IRS values a piece of art differently than previous appraisals.
It is best to be cautious and assume that the estate will need some extra liquid assets to pay greater than expected estate taxes or that the art will have to be sold to pay the taxes.
Reference: Barron's (June 18, 2016) "How Art Can Blow Apart Your Estate"