One of the most frequent questions posed to us by our tax clients is in regards to record keeping for charitable contributions. Below is a summary of the record keeping requirements and an example of what may happen if these requirements are not met.
The IRS rules for substantiating deductions for charitable contributions are strict. The taxpayers in a recent U.S. Tax Court case found this out the hard way when the court denied their deduction of more than $37,000 for numerous non-cash items donated to various charities. To add insult to injury, the court assessed a 20% accuracy-related penalty on the taxpayers.
General Documentation Requirements
In most cases, a taxpayer can deduct the fair market value (FMV) of property held longer than 1 year donated to charitable organizations. This is true whether the property has increased or decreased in value during that time. However, in order to back up these deductions, the IRS requires that the taxpayer provide detailed documentation of when and where the property was donated and its FMV, which includes independent appraisals for high-value gifts.
Since they have daily experience with receiving and documenting gifts, the IRS recommends using the guidelines provided by established charities to determine and record FMV of commonly donated items. It’s important to remember that in order to qualify for a tax deduction, donated items must always be in good condition and proper documentation must be provided in order to avoid audits or even penalties.
There are a few general tiers of gift amounts which require different levels of documentation in order to make sure a deduction is adequately substantiated. Regardless of the dollar amount, however, it is always best to keep as many timely records as possible.
$0-$250: Keep all available written records, including receipts with the organization name, location of donation, and a description of the donated items. For small dollar amounts such as these, a receipt is not required where impractical, such as using a donation drop box. Still, it is important to keep records such as the FMV of the donated property and how that value was determined.
$250-$499: At this level, make sure you receive an acknowledgement from the charity for each gift, even if you make multiple gifts to the same charity in the same year. If you received any benefits in exchange for your gift, such as a gift card or services, you must provide a value or a good-faith estimate of the value of those benefits.
$500-$4,999: As with other levels, thorough documentation is key. As gifts are more and more valuable, it becomes more important to include as many details as possible. For gifts in this range, be sure to have a written acknowledgement from each charity for each donated item along with records which show the approximate date you gained possession of the item, when it was donated, the FMV of the item, how that value was determined, and a detailed description of the item. Gifts at this level or above should contain an aggregate of “similar” items donated to any charity.
$5,000+: For large donations of $5,000 in value or more, include all of the previously mentioned documentation in addition to an independent appraisal of the item(s), a copy of which you should attach to your federal income tax return.
Key Points
- If you are planning to deduct charitable contributions of any value or amount, thorough and accurate record keeping is essential. Even if it is not absolutely required by the IRS or if you don’t think it is necessary, it is always better to have that information on hand in case your claims come into question. When in doubt, contact your accountant.
- Gifts must be in good condition in order to be claimed as deductions. If the items, no matter what they are, are not considered to be in good condition, they cannot be listed as a deduction. Proper documentation should substantiate a gifted item’s condition when it was donated.
- Be sure to get detailed receipts from the receiving charity for any gift you plan on deducting. This information will help to substantiate what was donated, when it was donated, where it was donated, and potentially how much the donation was worth in terms of FMV.
- For gifts exceeding $5,000 in value, you must take the extra step of an independent appraisal. Whether the gift is a single automobile or an entire collection of books or jewelry, you must have the appraisal conducted and documented to avoid scrutiny by the IRS.
- Be aware of penalties. Failure to secure proper documentation or an attempt to take advantage of the system can not only cost you your deduction, but could also result in a steep penalty from the IRS.
- For an example of how poor record keeping and unsubstantiated deduction claims can result in a penalty from the IRS, see the summary of this recent case which was decided in federal tax court.
The Bottom Line
When making charitable donations, there’s no substitute for accurate recordkeeping. Make sure you comply with the strict letter of the law so you can withstand any potential IRS challenge to your deductions. Contact your Fordham & Co LLP professional tax advisor if you’re unsure about the substantiation requirements or need to be referred to a qualified appraisal professional.