The IRS and Congress has gotten much more aggressive in requiring proper documentation of a charitable donation in excess of $250. Without this documentation, the IRS has the right to completely deny the deduction even though the taxpayer has a cancelled check AND a letter from the charity. In order for the deduction to be allowed, the documentation must generally include the following information:
- The amount of cash donated (if any),
- A description of any property other than cash that was donated (an estimate of the value of said noncash property is not required),
- Whether the charity provided any goods or services in exchange for the donation (other than intangible religious benefits), and
- A description and good-faith estimate of the value of any goods and services provided by the charity in exchange for the donation.
Also, the taxpayer needs to receive this before filing their return.
The most often error that we see is the second item. Many times, the taxpayer will get a listing from the church of all of their donations, but this statement is not included. If this tax return was audited, the taxpayer would stand a good chance of losing the deduction.
A recent Tax Court case underlines how much this can cost the taxpayer. In Marshall Cohan case (TC Memo 2012-8), the taxpayer transferred a first right of refusal on valuable property on Martha's Vineyard in exchange for cash and other assets that were value at less than fair market value. This difference was valued at $2 million by the taxpayer and charity. The charity provided a written acknowledgement to the taxpayer of what was transferred to the taxpayer, but for some reason did not completely list the assets that the taxpayer transferred to the charity.
The Tax Court agreed with the IRS that the whole $2 million deduction was disallowed and in addition agreed that the taxable gain should have been $15 million instead of the $9 reported. Bad!
It also appeared that the taxpayer and the charity were playing audit lottery on purposely not reporting all of the items, so the Court agreed that the 20% negligence penalty also applied. Double Bad!!
Something as little as not completely listing property transferred on a charity transfer can cost taxpayers a large amount of money.