We can all learn from the mistakes of others. If you work closely with your tax professional and use him/her for tax planning services rather than merely tax preparation services, you would better understand the many nuances of the tax laws and how to survive an IRS audit examination.
The Tax Court case of Roberta Lee Howe vs. the IRS, Docket No. 21360-13S, TC Summary Opinion 2015-26 dated April 10, 2015, illustrates why taxpayers claiming donations of clothing, furniture, and other non-cash items to charities such as Goodwill have a difficult time sustaining their donations if challenged by the IRS. While many a taxpayer complains about the information the IRS requires, they need to keep in mind that it is the taxpayer’s responsibility to carry the burden of proving the entitlement to the claimed deductions. By knowing what the IRS requires, you have a much better chance of having your tax deductions accepted by the IRS.
The Tax Court decided in favor of the IRS’s denying the taxpayer’s non-cash charitable contributions when considering the following factors:
- Receipts lacked a detailed description of property. Descriptions such as “furniture” or “household goods” were not sufficient. It is important that a “laundry list” of the donated items be maintained by the taxpayer.
- Receipts lacked the value of the property donated. While the court acknowledged that the value of the property need not necessarily be on the receipt, the court stated that it was an item looked at by the court when determining if sufficient detail was included on the receipts of the taxpayers.
- Receipts lacked a signature of anyone acting on behalf of the donee organization.
- For items donated with a value greater than $250, receipts lacked a statement to the effect that no goods or services were rendered in exchange for the donated property. Without this statement, the taxpayer has no right to claim the deduction.
- The court acknowledged that while the taxpayer used donation guides from the Goodwill and the Salvation Army to determine the value of clothing donated, the receipts did not describe the age or condition of the clothing donated.
- The court discussed the need for non-cash donations that exceed $500 to provide a detailed description of the donated property, including how the property was obtained, the approximate date of acquisition, and the cost of the donated property.
- Donations of less than $250 are considered “similar items of property” and are grouped together in determining whether the $500 threshold applies. “Similar items of property” means property that falls into the same general category or type, such as furniture, electronic equipment, or clothing.
Thus, if you want to “audit proof” your non-cash charitable contributions,
- Make a detailed list of the goods you are donating;
- Make a note of the condition of each item on your list (excellent, good, fair, etc.);
- Use a donation guide to determine the value of the donated goods and maintain that guide with your tax records;
- Take photographs of your donated items to support the quantity and quality (condition) of the donated goods;
- Obtain the signature of the person at the charitable organization who is accepting your donated goods;
- Attach your detailed listing of the goods donated to the receipt you receive;
- If the value of the donated goods is over $250, the charitable receipt must state that no goods or services were received in exchange for your donated goods; and
- If the value of the donated goods is over $500, make a good-faith effort to approximate the date when the donated goods were acquired by you, note how they were acquired by you (purchase, gift, inheritance, etc.), and approximate the cost of the goods when acquired by you.
We have heard from many a taxpayer that the IRS’s requirements are too stringent. We agree. But if you want to have your donations sustained under audit, these are the steps you need to follow. We have made the personal decision that rather than spending the time documenting non-cash charitable contributions, we merely donate the goods with the knowledge that someone less fortunate will be better off.
If you want to learn more about tax planning strategies, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.