The tax attorneys at Nardone Limited, in Columbus, Ohio, strive to regularly report on IRS audit and exam issues that may affect our clients. Charitable giving typically peaks as the tax year comes to a close for most individuals and businesses, especially during the holidays. It is important for purposes of IRS audits and exams that taxpayers retain the correct kind of documentation for their charitable contribution deductions.
Charitable Contribution Deduction
Taxpayers who itemize their deductions are entitled to deduct the amount of contributions made to qualified charitable organizations. Internal Revenue Code §170. Taxpayers report their charitable donations on Schedule A of Form 1040, U.S. Individual Income Tax Return. Deductions are available for contributions of cash, goods, securities, and intellectual property. A taxpayer may not take a charitable contribution deduction for the value of services rendered. For example, a taxpayer cannot deduct the value of his time spent volunteering at a food bank, however, he could deduct the value of the truck or cash he donated to the food bank. There are special rules concerning substantiation of different types of donations. To withstand IRS audits and exams taxpayers must be familiar with the substantiation requirements and have the substantiating documentation handy.
What Kinds of Contributions Qualify for Deductions?
As stated above, a charitable contribution is only deductible if made to a qualified charitable organization. Qualified charitable organizations exist exclusively for the advancement of religious, charitable, or educational purposes. These organizations are tax-exempt and have filed the requisite paperwork to receive charitable contributions with the IRS. In other words, while a taxpayer may have charitable intent when he gives his coat to a person in need, the IRS will not honor a deduction for the cost of the coat, because the taxpayer did not make a contribution to a qualified charitable organization. The IRS would allow a deduction if the taxpayer donated his coat to a qualified charitable organization, like the Salvation Army, and acquired the requisite supporting documents. Additionally, charitable contributions must not involve reciprocity of any kind. The IRS would allow a deduction for contribution to a taxpayer’s place of worship, if the taxpayer received nothing of value in return for his donation. But, if the taxpayer’s donation went towards payment of the taxpayer’s child’s parochial education, then the IRS would disallow at least the portion of the deduction attributable to the tuition. It is not determinative that the parochial school is a qualified charitable organization; the IRS may still deny a deduction if the contribution involves a measurable benefit to the taxpayer.
What Kind of Documentation Does the IRS Require?
The presumptive reason that the IRS requires deductible donations to be made to qualified organizations is ease of administration and promotion of truthful tax reporting. The coat recipient in the first example will likely not be available to substantiate the donation when the IRS comes knocking. In that vein, there are a number of substantiation requirements for different types of donations. The general rule is that when the donation is larger, the substantiation must be stronger. For cash donations, the donor must maintain a bank record, cancelled check, receipt or other communication from the donee. If the taxpayer donates property other than cash to a qualified organization, he may generally deduct the fair market value of the property. For noncash gifts of less than $250, the taxpayer must maintain a receipt from the donee, including the donee’s name, the date and location of the donation, and a detailed description of the donated property. For any contribution of $250 or more (including contributions of cash or property), a taxpayer must obtain and keep in his records a contemporaneous written acknowledgment from the qualified organization, indicating the amount of cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. If a taxpayer takes a donation for more than $500, he must include a description of the donated property with the tax return. For non-cash donations of over $500, the taxpayer must fill out Form 8283, Noncash Charitable Contributions, and file the form with the tax return. For noncash gifts over $5,000, taxpayers must get an appraisal. Failure to provide any of the required documentation may result in the IRS disallowing the deduction. The IRS’s disallowance of a deduction results in increased tax liability for the taxpayer. Thus, it is important that taxpayers make sure they can support each and every deduction with the appropriate documentation, or taxpayers may face unexpected liabilities.
Contact Nardone Limited
The tax attorneys at Nardone Limited have a great deal of experience representing taxpayers who are undergoing IRS audits, IRS exams, or criminal tax investigations. To the extent you have questions relating to charitable tax deductions and substantiation or any of the above, you should contact one of the experienced attorneys at Nardone Limited.