Charitable Contributions and the IRS
by John M. Lohman, CPA
It is tax time and your charitable giving was not just virtuous; if you itemize deductions on your return, it will also lower your federal taxes.
The IRS reminded everyone in Internal Revenue Bulletin IR 2015-134 of the rules regarding documenting charitable donations. Omitted from this guidance however, was the requirement that written acknowledgement from a charity for donations of $250 or more must be contemporaneous and include a statement indicating whether any goods or services were provided.
The IRS defines written acknowledgments as contemporaneous if obtained at the earlier of:
- Date taxpayer files original return for year of contribution; or
- Due date (including extensions) for filing original return for that year.
In the past few years, several otherwise legitimate and substantial charitable contribution deductions have been denied taxpayers by the IRS because the statement from the charity was obtained after-the-fact.
In these cases, the taxpayers could prove that the donations were actually made to qualified charities, but the acknowledgements from the charities were obtained after the taxpayer was notified of the audit, thus failing the “contemporaneous” rule that applies to this type of documentation.
The IRS has also successfully denied substantial charitable deductions to taxpayers merely because the acknowledgement from the charity did not include language indicating no goods or services were provided in exchange for the contribution. The taxpayers subsequently requested another acknowledgement from the charity with the appropriate “no goods or services” language, but the IRS still disallowed the deduction because the second acknowledgement was not “contemporaneous”.
If you are audited, your charitable donations could be inspected in detail and any shortfall in the documentation may cause the associated deduction to be disallowed. The following summarizes the documentation rules for most common charitable contributions.
To deduct a contribution of cash or other monetary gift of less than $250, you must maintain one or more of the following:
- Bank record
- Credit card statement
- Payroll deduction record
- Written communication from the organization that contains the name of the organization, date and amount of the contribution
Telephone bill (for text message donations), must show organization, date and amount given.
To claim a deduction for any one contribution (cash or property) of $250 or more, you should have your bank record (or similar item), but you must have written acknowledgement (contemporaneous) from the qualified organization showing:
- Amount of cash donated; or
- Description of the property contributed
- Statement of whether the organization provided any goods or services in exchange for the gift
- Estimate of value of any goods or services provided by the donee organization.
Charitable organizations are not required to automatically provide these over-$250 acknowledgements, but they must be provided if you request them. Typically, most charitable organizations do provide these statements for the convenience of their donors.
Separate contributions of less than $250 are not subject to these rules even if the sum of the contributions to one organization totals $250 or more.
For all non-cash donations, the deduction allowed is based on fair market value (FMV). Fair market value is the price at which property would change hands between a willing buyer and a willing seller. Typical FMV choices for valuing your non-cash donation would be: thrift shop value, appraisal, comparable sales (purchase price), catalog price, and other.
Most used household goods and clothing items are valued using “thrift shop value”. The IRS also publishes a list of suggested values for various articles of used clothing that can be used to put a value on your donations of used clothes.
For all donations of property, including clothing and household items, you should get a receipt that includes:
- Name of the charity
- Date of the contribution
- Reasonably-detailed description of donated property
If a donation is left at a charity’s unattended drop site, you should keep a written record of the donation that includes this information, as well as, the fair market value of the property at the time of the donation and the method used to determine that value.
Special rules apply to the donation of an auto, boat or plane. Unless the organization uses the donated vehicle in pursuing its exempt purpose, your donation is limited to the sales price the charity obtains when the donated vehicle is sold. The amount the vehicle is sold for is reported back to the donor on Form 1098-C. This rule applies if the claimed value is more than $500.
Donations of publicly traded stock are valued based on the trading price on the day of the donation.
Filing Requirements and Other
If the total of all your non-cash donations exceeds $500, then the detail of these contributions must be reported on Form 8283 with the filing of your return. In addition to the information discussed earlier, you must also report how and when the property was acquired and the cost (or basis) of the property.
If your non-cash donations of an item (or group of similar items) are valued at more than $5,000, then a qualified appraisal must be obtained. Both the charity and the qualified appraiser must provide signature verification on Form 8283 as part of your return. Generally, appraisals are not required to be attached to the tax return, but they should be retained as important tax records. Appraisals should be attached for donations of art valued at $20,000 or more, easements on historic buildings and donations of an item or group of similar items valued at $500,000 or more.
As a reminder, contributions to individuals, political organizations and candidates are not eligible for the charitable donation deduction. Only donations to qualified organizations can be deducted for tax purposes. Organized churches are typically considered qualified organizations. The IRS maintains a list of the qualified organizations it recognizes (other than churches). Visit www.irs.gov/charities to search for organizations that are eligible to receive deductible charitable contributions.
Generosity to charities should be rewarded by the appropriate tax deduction. Be diligent in collecting the required documentation before filing your return to avoid disallowance upon audit.