Situation: Year-end tax planning often includes consideration of charitable contributions of cash and property. In addition to getting a good feeling from giving, your client can also receive a tax deduction. However, in order to receive a deduction for charitable contributions, the client must meet new, stricter substantiation rules.
Solution: Recently released
Internal Revenue Service guidance in Information Relation 2008-138, issued Dec. 9, and recent court cases provide sobering guidance and serve warning of lost tax deductions if your client does not meet the stricter documentation requirements.
A few years ago, all a client simply needed in most cases was a canceled check to document charitable contributions. Now the rules are much stricter.
A recent court case illustrates how easy it is to not meet the stricter documentation requirements and thus fail to achieve a tax deduction for items that are clearly charitable contributions.
In the recent Gomez case, the taxpayers contributed about $6,500 to their church in 20 separate checks. At least 10 of the checks, for a total of $6,100, were for more than $250 each. The tax rules require a “contemporaneous written acknowledgment” for contributions of $250 or more. Also, this receipt has to include appropriate language about any goods or services received in return, and the taxpayer has to receive the receipt by the due date of their return or, if earlier, the date the they actually file the return.
Even though the taxpayer had canceled checks supporting the contributions and a letter from the church to document the donations, he failed to achieve a tax deduction, because the church letter was dated after the filing of his tax return and did not include the required “no goods or services provided in return” or “only intangible religious benefits provided in return” language.
The taxpayer made charitable contributions to a valid charity but lost most of his contribution deduction because of the substantiation technicalities.
The IRS did allow $421 of the claimed charitable contributions for checks for less than $250 because canceled checks are sufficient documentation when less than $250.
Similarly, in the Ney case, a taxpayer failed to achieve a charitable contribution deduction on a large gift of property because the taxpayer failed to meet the substantiation technicalities by not properly completing forms and not obtaining appraisals for larger property gifts on a timely basis.
Additional guidance on requirements for qualified appraisals and qualified appraisers are in the recently issued regulations. The regulations also provide guidance on substantiating contributions for taxpayers who incur unreimbursed out-of-pocket expenses while performing charitable work.
Prior to the recent IRS guidance, it appeared that such taxpayers might lose their deductions for these types of expenses since it generally is not practical to obtain receipts from charities for out-of-pocket expenses. Fortunately, if the out-of-pocket expenses for a charitable activity or event are less than $250, the taxpayer can document the expenses simply by keeping appropriate receipts or other reasonable written evidence.
Guidance is also provided for contributions of clothing and household items, noting that items must be in “good used condition or better.” A receipt must be obtained at the time of the contribution if the value is at least $250, or a “reliable written record” such as a detailed receipt from the charity for a contribution of good used condition items if the value is less than $250.
