The IRS continues to audit and deny tax deductions to taxpayers who fail to FULLY satisfy the required charitable contribution reporting requirements. David and Veronda Durden had made contributions to their church by check with most of the checks larger than $250. When audited by the IRS, the couple provided copies of their checks and a statement from their church acknowledging $22,517 of contributions. The average taxpayer would think that armed with copies of their paid checks and a statement from their church acknowledging the receipt of the contributions that this was a slam dunk for the taxpayer.
However, the IRS denied the tax deduction because Internal Revenue Code (IRC) Sec. 170(f)(8) provides that to be tax deductible, a contribution of $250 or more must be substantiated by a contemporaneous written acknowledgement from the donee organization that indicates the amount and whether the organization provided any goods or services in consideration for the contribution and, if so, a good-faith estimate of the value of what was received. In other words, the IRS denied the tax deduction solely for the lack of a contemporaneous statement from David and Veronda Durden’s church that they had not received any goods or services in return.
What did the Durdens do? Well, they went to their church and obtained another statement which again showed the amount of their contributions PLUS added the language that no goods or services had been received by the Durdens in return for their contribution. Again the IRS denied the tax deduction and the Durdens went to Tax Court to appeal the IRS’s denial of their charitable contribution.
Did the Durdens prevail in court where they argued that since they were in substantial compliance with the IRC, their charitable tax deduction should be allowed? No, as the Tax Court upheld the disallowance of more than $22,000 of charitable contributions as a tax deduction. Why did the Tax Court rule in favor of the IRS?
The Tax Court agreed with the IRS that taxpayers must have a cancelled check, payroll deduction, or written receipt from the charitable organization to claim a tax deduction for cash contributions. Furthermore, the proof of payment must be contemporaneous – it must be obtained before the tax return is filed. Since the Durden’s second letter from their church was dated June 21, 2009, after the date that their return was filed, it was not contemporaneous.
This case (Durden, T.C. Memo 2012-140) hopefully illustrates that taxpayers must comply with ALL of the IRS’s rules regarding charitable contributions or any other tax deduction.
The rules regarding cash contributions are laid out above. Keep in mind that unsubstantiated cash donations are not allowed. If total non-cash donations are made of less than $500, the taxpayer needs to provide the name of the charity and the fair market value of the donation. The rules become more stringent for non-cash charitable contributions that total $500 or more. The taxpayer must then report the name of the charitable organization, its address, the date of the contribution, the value of the donated property, how the value was determined, the date of purchase, the condition of the property when donated, and the cost of the property when purchased. For non-cash contributions that total over $5,000, independent appraisals must be obtained to substantiate the value of the donated property.
Taxpayers often loathe providing the required substantiation reasoning that their CPA is asking for unnecessary documentation. In some cases denying charitable contributions (e.g., Friedman v. Comm’r, TC Memo 2010-45, March 11, 2010), the IRS has assessed the taxpayer negligence penalties for disregarding IRS rules and regulations. The Friemans argued that they were not subject to the penalty because they had relied upon the advice of a professional tax advisor. The court approved the penalty stating that the taxpayer had failed to prove that “the adviser was a competent professional who had sufficient expertise to justify reliance.” The court further stated that although the tax preparer was a CPA, the court found that working with a CPA does not necessarily make the CPA a competent tax adviser. This is one of our favorite court cases because it clearly illustrates the importance of taxpayers working with an experienced tax professional rather than a preparer who simply enters data into a tax preparation software program.
What is the lesson to be learned? When submitting your tax documents to your tax professional to have your personal tax return prepared, be sure to supply all of the requested support documents. Failure to do so could increase your odds of being audited by the IRS and will likely result in a loss tax deduction.
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