Make Sure Charitable Contributions Pass Strict Documentation Rules
Tax code missteps can prove costly, as a recent Tax Court case illustrates.
The case: David and Veronda Durden filed a joint return for 2007 claiming a deduction of $25,171 for charitable contributions made by cash or check, most of which went to their church. The majority of the checks exceeded $250.
In April 2009, the IRS disallowed the taxpayersâ€™ claimed charitable contribution deduction for 2007. In response, the taxpayers produced records of their contributions, including copies of canceled checks and a letter from the church dated January 10, 2008 acknowledging their contributions during 2007 â€“ contributions that totaled $22,517.
The IRS did not accept this acknowledgment and informed the taxpayers that it lacked a statement regarding whether or not any goods or services were provided in consideration for the contributions.
The Durdens obtained a letter from the church dated June 21, 2009 that contained the same information in the first acknowledgment as well as a statement that no goods or services were provided in exchange for the contributions.
The IRS discounted the Durdensâ€™ first acknowledgment because it failed to state whether or not any goods or services were received, and it further discounted the second acknowledgment because it was not contemporaneous.
Their argument: under the tax code, the court noted that no deduction is allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment of the contribution by the donee organization. For donations of money, the doneeâ€™s written acknowledgment must state the amount contributed, indicate whether the organization provided any goods or services in consideration for the contribution, and if so, provide a description and good faith estimate of the value. A written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of the date the taxpayer files the original return for the year of the contribution or the due date (including extensions) for filing the original return.
The Durdens conceded they did not strictly comply with the law, but argued that they substantially complied and were still entitled to the deduction. The court noted that it has allowed â€œsubstantial complianceâ€ in some cases where, despite a lack of strict compliance, the taxpayer substantially complied by fulfilling the essential statutory purpose. The doctrine of substantial compliance is designed to avoid hardship in cases where a taxpayer does all that is reasonably possible, but nonetheless fails to comply with the specific requirements of a provision.
The court listened to the Durdensâ€™ arguments but sided with the IRS and held that the taxpayers failed to strictly or substantially comply with the clear requirements of the law. Therefore, the deduction was disallowed. (Durden, T.C. Memo. 2012-140)
Though seemingly harsh, this isnâ€™t the first time a taxpayer has been denied a charitable contribution deduction because of poor documentation. The rules are strict.
What the Case Means for All Taxpayers
â€œWhile this case highlights the importance of conscientious record-keeping when it comes to charitable giving, itâ€™s possible to avoid any such problems with a relatively modest amount of diligence,â€ says Rehmann advisor Tom Mulvihill.
Avoiding such problems can be as easy as 1-2-3:
1. Donâ€™t rely on the charity to provide the correct documentation. Many organizations know the rules and are careful, but some are not. The larger the contribution, the more care you should take.
2. Set up a reminder to look for a statement or acknowledgment from the charity after making a substantial contribution. Most charities will follow up with a statement, though some will mail it out just after the end of the year. Contact the charity if need be to better understand their statement process.
3. After receiving the statement, make sure the amount listed is correct and all other requirements are met.
Hereâ€™s a synopsis of the most frequently encountered charitable donation rules:
Cash contributions. No matter how small the amount, you need:
â€¢ A canceled check, credit card statement, or other banking record or
â€¢ A receipt or other written documentation from the charity with the doneeâ€™s name, amount, and date of contribution.
That $5 bill you drop in the kettle during the holidays? It isnâ€™t deductible unless you get a receipt.
For contributions of $250 or more. Youâ€™ll need an acknowledgment from the charity.
Noncash donations under $250. For each donation, you must have a receipt or letter from the organization indicating the organizationâ€™s name, date and location of donation, and a description (no indication of value required) of the property donated.
Many charities are lax with the rules. Make up a detailed list of items before contributing (donâ€™t just write â€œfive bagsâ€). If thatâ€™s impractical, for example in the case of a clothing drop box, you may be able to satisfy the requirement with a reliable written record.
Contributions of $250 or more. For these donations, you must receive a contemporaneous written acknowledgment from the organization. It must include:
â€¢ The amount of cash and/or a description of the property contributed.
â€¢ Whether or not any goods or services were provided in return for the contribution and a good-faith estimate of the value of the goods or services.
â€¢ A statement that the only benefit you received was an intangible religious benefit, if that was the case.
Noncash contributions of more than $500. Property contributions of more than $500 require a description on IRS Form 8283 of your tax return of the donated property and certain other requirements. The $500 threshold is determined by totaling all similar items of property donated to one or more organizations and treating that as a single item.
Noncash contributions of more than $5,000. You need a qualified appraisal of the property donated. There are certain exceptions to this rule. One is for publicly traded securities for which market quotations are available on a securities market.
Vehicle contributions. If the vehicle is valued at more than $500, you need an IRS Form 1098-C or other contemporaneous written acknowledgment from the charity. The rules here can get complicated. Talk with your tax adviser before contributing.
Payroll deductions. Save the W-2, pay stubs, or other documentation provided by your employer. You must also have a pledge card or other document prepared by, or for, the qualified organization that shows its name. If your employer withheld $250 or more from a single paycheck, you must also have an acknowledgment from the charity that you did not receive any goods or services in return for any contribution.
There are other rules dealing with conservation easements, contributions of appreciated property, facade easements, etc. And, while there are chances to save some significant tax dollars with these types of donations, there are plenty of traps. If youâ€™re making a substantial contribution, or a series of contributions over time, check the rules carefully and consult with your tax adviser.
â€œItâ€™s best to keep in mind that that act of donating to a charity extends beyond merely writing a check or delivering goods,â€ says Mulvihill. â€œThere are some additional steps to take before addressing the tax implications of such giving.
â€œThankfully,â€ Mulvihill adds, â€œthe requirements are not so onerous as to obscure the kindness and generosity at the heart of such transactions.â€
CPA and Consulting