by Chris Moss CPA
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All taxpayers at one time or another have made tax deductible charitable donations under IRS Code 170. But would your charitable deduction hold up during an IRS Charitable Deduction Audit? While Façade Easements were recently the focus of IRS Charitable Deduction Audits, the IRS still disallows Façade Easements as well as your normal routine cash and noncash donations during an IRS Charitable Deductions Audit. In fact, the IRS is just as likely to commence a regular and routine IRS Charitable Deductions Audit against you in many cases years after you file your tax return. So if you have made a donation to your favorite charity and plan on deducting these donations on your 2015 income tax return in accordance with IRS Code 170, stay tuned to TaxView with Chris Moss CPA Tax Attorney to learn how to comply with Government regulations for legal record keeping of cash and non-cash charity donations, and see where IRS Charitable Deductions Audits are trending in 2016 so you can make sure you don’t lose an IRS Charitable Deduction Audit headed your way soon.
Regarding noncash donations to Purple Heart, Goodwill, Salvation Army and other similar organizations, the IRS seems to be just waiting to disallow all these deductions during an IRS Charitable Deduction Audit just as they did to Kenneth and Susan Kunkel in Kunkel v IRS US Tax Court 2015. The Kunkels deducted on their 2011 Sch A tax return noncash charity donations of $37,315 comprised of household items, books, clothing, furniture, and toys donated to the Lutheran Church, Goodwill Industries, Purple Heart, and Vietnam Veterans. The Government not only disallowed the whole deduction in an IRS Charitable Deduction Audit claiming the Kunkels had lack of substantiation but also hit the Kunkels with an accuracy related penalty plus interest. The Kunkels fought back appealing to US Tax Court in Kunkel v IRS US Tax Court 2015. Indeed the Kunkels produced for the Court the receipts given to them by the various organizations and in my view very detailed spreadsheets of exactly what they had contributed but unfortunately this wasn’t good enough to overrule an IRS Charitable Deduction Audit.
Judge Lauber of the US Tax Court observed that Section 170 indeed allows the Kunkels to deduct their charity contribution, cash or noncash, made within the taxable year to a charitable organization. However charity cash or noncash deductions are allowed only if the Kunkels can satisfy statutory and regulatory requirements of 170(a)(1) and Regulation 1.170A-13. Whether cash or noncash, if you make donation over $250 you must obtain a contemporaneous written acknowledgement from the charity. For a noncash donation that exceeds $500 then you are subject to even more rigorous substantiation requirements, and finally if the noncash donation is higher than $5000 you are subject to highest substantiation requirement including a qualified appraisal which must be included in the tax return prior to filing.
The Court also noted that similar items of property must be aggregated in determining whether the noncash gift exceeds the $500 and the $5000 thresholds as per Section 170(f)(11)(F). While clothing, jewelry, furniture, electronic equipment, household appliances or kitchenware are considered separate categories the Government in an IRS Charitable Deduction Audit in many cases aggregates as much of your donation as they can into one category so that they can push you into the next more rigorous substantiation threshold. Unfortunately for the Kunkels the Court aggregated their donations in 2011 to add up to $21,920 for clothing, $8000 for books, which subjected them to the $5000 threshold. The rest of the donations were aggregated over the $500 category threshold. There was little that the Kunkels could do to dispute these groupings because their tax return lacked contemporaneous evidence within the tax return itself.
The Court went on to list the requirements of any contribution (cash or noncash) over $250. There must be a “contemporaneous written acknowledgment of the contribution by the charitable organization citing Weyts v IRS T.C.Memo 2003-68. The charity also must give you a description of any property other than cash, and whether or not you received any goods or services back from the charity. If you did receive some sort of goods or services back from the charity, then the charity must provide you a good faith estimate of the value of those goods and services. Finally and most importantly the evidence that you receive in form of documentation from the charity must be “contemporaneous”. In other words the facts will have to show perhaps later that you had all your documentation in your possession by the date you filed your tax return.
For noncash donations, the documented facts are a much difficult to gather contemporaneously but nevertheless essential to you winning an IRS Charitable Deduction Audit. As an example, Goodwill, Purple Heart and Salvation Army usually pick up clothes and other household goods direct from your doorstep, in many cases when you are not at home leaving a receipt hanging on your door handle. While the Court acknowledged that at times it might be difficult to obtain the required documentation, when property is left at a charity’s unattended drop site, the Court nevertheless placed on Kunkel the burden of obtaining the necessary documentation prior to them filing their tax return.
The Court then went on to address noncash contributions exceeding $500. Citing Gaerttner v IRS TC Memo 2012-43 Judge Lauber opined that the records Kunkel should have obtained prior to filling their tax return were at minimum: 1. The date the Kunkels acquired the property and how they acquired the property, 2. A description of the property, 3. The Cost of the property, 4, the Fair market value of the property at the date of contribution and 5, the method the Kunkels used in determining fair market value as per Section 170(f)(11)(B) and Regulation 1.170(A)-13(b)(2)(ii)(C) and (D).
The Court was not without compassion for the Kunkels charitable intent, and conceded that “no doubt the Kunkels did donate some property to charity in 2011.” But the Court concluded that the IRS Code imposes a series of increasingly rigorous substantiation requirements for larger gifts, especially when the consist of household property rather than cash and that the documentation required by law was simply not present in the Kunkels 2011 tax return that they filed with the Government. Indeed, the Court also found the Kunkels negligent in filing a tax return without supporting documentation and hit them with a substantial Section 6662(a) penalty plus interest. IRS wins, Kunkels lose.
So how can you win an IRS Charitable Deduction Audit if you have noncash donations in excess of $500? First, have your tax attorney include in your tax return the facts and evidence you need to win an IRS Charitable Deduction Audit. Best practice for larger noncash donations would be insert the required documentation into tax return itself prior to filing to prove that the evidence was contemporaneously created. Second, do not make the donation if the charity cannot give you the IRS required information. If you don’t have the facts on your side simply don’t take the deduction. Not only are you not going to win the audit without the facts and evidence contemporaneously documented in your tax return, but you will also get hit with a substantial negligence penalty plus interest. Finally, if the charity cannot give you the required documentation simply consider donating to another similar charity which perhaps can provide you the required government documentation to sustain an IRS Charitable Deduction Audit. After you file your tax return with the required facts and evidence you can then sit back and relax, knowing that when the IRS Charitable Deduction Audit commences, perhaps years later, you are going to win big.
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