This is a tale of two taxpayers being audited by the IRS for non-cash charitable contributions. Let’s see how their audit exams went.
Taxpayer A (let’s call her Mary) made $3,000 worth of contributions to Goodwill, the Salvation Army, Wounded Warriors, and other non-profit organizations. Before delivering these goods to these charities, Mary always took photographs of the goods she was donating to illustrate the condition of the donated goods and made a listing of the goods donated. The listing showed a description of the goods delivered, the approximate year that the goods had been acquired by Mary, an estimate of the cost of the goods when obtained by Mary, and using the Salvation Army’s Donation Value Guide, Mary assigned the value for each item she donated. She then attached the receipt from the charitable organization to her documentation.
Taxpayer B (let’s call him Bill) made $3,000 worth of contributions to Goodwill, the Salvation Army, Wounded Warriors, and other non-profit organizations. Bill stuffed the donated goods into giant plastic bags and delivered them to these charities. He received a receipt from each charity that read something like “Received 12 bags of clothing on April 14, 20XX”. Bill then wrote on each receipt what he deemed to be the value of the goods delivered.
Both Mary and Bill each claimed $3,000 of non-cash charitable gifts.
The IRS agent auditing Mary looked at the substantiation she had, and realizing that while he could possibly contest the value shown for a particular item, he realized that Mary would likely prevail if she went to IRS Appeals Office or even to Tax Court. He also realized that with her support, any assessment that he did get would be minimal and not worth the time and effort he would need to expend to write up his audit report. He realized that there were bigger fish in the sea and decided to make no changes to Mary’s return.
The IRS agent auditing Bill smiled broadly when Bill was only able to produce the receipts showing the number of bags and Bill’s best guess of the value of the donated goods. The agent realized that these receipts were not sufficient evidentiary matter to support Bill’s deduction and denied in full the $3,000 deduction. When Bill vehemently protested, the agent told Bill that if he can provide contemporaneous support for his deductions, he would consider allowing some part of the claimed deduction. The agent also called his manager and shared with him that Bill had no support for his charitable contributions and asked if he should expand the scope of his audit to look for other unsubstantiated deductions. Bill played the audit lottery and lost!
The lesson learned here is that while Mary undoubtedly took more time to prepare her return, by doing so she almost assured herself that the IRS would not be making any audit adjustments to her return and she will not receive any unexpected and untimely tax assessments from the IRS and will sleep much better than Bill. She will also undoubtedly pay less to have her tax return prepared by a tax professional than Bill will, because Bill’s tax preparer will spend more time on his return chasing down the information needed to complete that return.
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