A very successful California entrepreneur was denied an $18.5 million tax deduction for his charitable donations because he failed to follow the IRS substantiation rules when filing his self-prepared individual income tax return. We found the Tax Court decision (T.C. Memo. 2012-152) of interest because while there was no question that the taxpayer made some very generous charitable contributions, the IRS prevailed in denying the tax deduction not based on the valuation of the donations, but because the taxpayer failed to substantiate the deduction according to the IRS’s rules.
When reviewing the tax organizer completed by our clients for individual income tax preparation, we often need to contact the client and request if he has complied with the IRS substantiation requirements relating to the claimed charitable contributions which he failed to acknowledge on the tax organizer. By knowing in advance what the IRS requirements are and complying with them, taxpayers are entitled to their charitable tax deduction. By failing to comply with the IRS substantiation rules, the taxpayer increases the odds of being audited by the IRS and having the tax deduction denied.
For those who are interested in reading about the lost $18.5 million tax deduction, please use the link provided below.