IRS Looks to Charities for Money

As we enter the “season of giving” we often aren’t thinking about the consequences on our tax deductions from failing to document these charitable donation.　Over time the documentation rules for charitable contributions have tightened putting a higher burden on taxpayers to substantiate their charitable giving. Currently the rules in place disallow otherwise deductible amounts if you don’t obtain the correct documentation before filing your income tax return.

Recent IRS audits are even more focused on the charitable donations, indicating that the government sees this area as a fruitful source of more revenue.　Our office has gone through many IRS audits and inevitably the IRS auditor wants proof of some of the charitable contributions.　Recently however, the IRS has stepped it up a notch when the auditor asked “proof that the Salvation Army was a qualified organization”.

Therefore, we wanted to outline briefly the current rules regarding documentation of your charitable donations:

• All non-cash contributions require a written receipt from the done organization, and certain noncash contributions (e.g. amounts in excess of $5,000 and autos) have additional requirements.
• Cash contributions (including those paid by cash, check, electronic funds transfer, debit card, credit card, or payroll deduction) of less than $250 can’t be deducted unless the taxpayer keeps either:　 1) a bank record that shows the name of the donee organization and the date and amount of the contribution; 2) a receipt, letter, or other written communication from the donee organization that shows the organization’s name and the date and amount of the contribution; or 3) payroll deduction records that show the organizations name, date and amount of the contribution.

LACPA Note:　 We suggest taxpayers make monetary contributions by check rather than cash. The cancelled check would satisfy the above requirements by showing the name of the donee and the date and amount of the contribution. If cash is used, the taxpayer must obtain a receipt from the donee showing these items

Stricter substantiation rules apply to contributions of $250 or more. No charitable deduction is allowed for cash of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous (this means before you file your tax return!) written acknowledgment from the donee organization. The written acknowledgment from the charity must include:

• The amount of cash donated and a description (but not the value) of any property other than cash contributed; although the charity needn’t value the gift of property, where an item or group of similar items exceeds $5,000, the donor must get a qualified appraisal and submit an appraisal summary with their tax return;
• Whether the donee organization provided any goods or services to the donor in consideration for the contribution. If so, there must be a description and good-faith estimate of the value of those goods or services provided, or if the goods or services provided consist entirely of intangible religious benefits, a statement to that effect.

If the substantiation requirement isn’t met, the deduction will be denied even if there are other reliable evidence of the contribution (e.g., testimony).　The substantiation requirement is not met if you wait to get your receipt later when under audit – it will be too late and you will lose the deduction.　Keep in mind, the IRS rules don’t place an information-reporting duty on charities. Where an acknowledgment is required, it’s the taxpayer’s responsibility to get one from the charity and keep it in his records

As you are opening your hearts and wallets this winter to make your year-end tax-deductible charitable contributions make sure that you aren’t going to later lose that deduction should you have an IRS audit.

November 2011

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.