Why You Should Know The Charitable Giving Rules
The average tither or charitable donor making their gifts using checks or cash will find themselves facing massive tax penalties at audit if the charity receiving the gift fails to comply with one of the simplest charitable giving rules.
Know The Substantiation Rules Or Suffer The Loss.
Whether you tithe for church, or make charitable donations to other local charities, you must know be aware of the need to substantiate your charitable donations, especially for those gifts in excess of $250.00. While most taxpayers keep copies of their cancelled checks used for their gifts, it is not always enough. Again, for gifts in excess of $250.00, the taxpayer should request and receive a letter acknowledging their charitable contribution (s) from their church or other charitable organization. This letter, like many I’ve seen from clients while preparing their income tax returns this year, must be on the charity’s letterhead. The date on the letter must precede the date the taxpayer files their return (more on this later). The letter must clearly state the amount donated whether the gift was given in one lump sum, or over the course of the year. Several churches provided a weekly accounting of their member’s giving in their charitable giving letters. Most even included an enlightening Bible verse.
While all of these are great, and required, most of the acknowledgement letters I’ve seen this year fail to include a key requirement of the charitable giving rules.
One Of The Charitable Giving Rules Should Wake You Up At 3 AM
Out of the 32 clients with itemizable charitable gifts this year, only three had the most important line on their receipts or letters of thanks. What’s the line?
The simple statement which reads, “No goods or services were provided by the organization in return for the contribution.”
What’s that you say? I must be kidding, you say?
I am not kidding.
No matter what shape or form your letter of acknowledgement may take, when it lacks a statement clearly stating the gift was given for no reason other than the desire to give, you are actually unable to legally take the deduction for the cash or checks you donated. Your letter is in violation of IRS regulations.
How Would The IRS Find Out?
Several new clients were referred to me this year. One such client had the temerity to tell me it was no big deal, there was no way the IRS could ever check everyone’s charitable giving letters. So I told this client the story about the Durden case (Durden, T. C. Memo 2012-140).
In this case, the taxpayers entered charitable deductions on their Schedule A totaling $25,171. Most of these deductions were made by check to their church. Included in their records were their cancelled checks and an acknowledgement letter from the church.
At audit, the IRS disallowed their deduction because their letter lacked, that’s right, you guessed it, a statement verifying neither goods nor services were given in exchange for their donations.
So, they went back to their church and got a second letter containing the required statement. They thought just getting another letter, in the proper format, would solve all of their problems.
The IRS rejected the second letter. Why? It did not meet the contemporaneous requirement. In order to meet this requirement, the letter had to have been received by the taxpayer by the earlier of the date their return was filed, or the return’s due date, including any legal extensions. The Tax Court agreed with the IRS. The deduction was disallowed. The taxpayers were slapped with additional taxes, penalties, and interest.
So, of course my new client says “Man, that’s no big deal. One family? That’s nothing.”
Sure. Unless you were also a member of their church who itemized their charitable donations on their Schedule A. See, the IRS knew just where to look.
Look, I don’t go fishing to show off my newest lures. I want to eat fish. I’m going to the lake, stream, or part of the shore where those babies are biting.
It only takes one return for the taxing authorities to discover new reasons to open further investigation.
The $100 Bomb.
If you think you only have to worry if you give small amounts, well, you should know me better by now. You know I’ve got another true story for you.
Several tax seasons ago, a good client of mine asked me include a donation she’d made to a friend’s church. She’d gone to hear the friend sing at a special church service, and her spirit was so moved by her melodious tones, she dropped $100.00, in cash, into the Special Offering plate.
And believe me. I know this lady. When she says she gave $100.00, well, it’s gospel.
Now, she gave me the church’s name, but lacked written proof she’d donated the $100. At my suggestion, she went back to the church in an attempt to secure an acknowledgement letter from the church for her generous gift prior to our filing her return. She decided to include the $100.00 in her return. Meanwhile, her continued attempts to receive the acknowledgement letter met with futility.
Several months later, (nowadays, with electronic filing, it doesn’t take long for those letters to arrive at your door), she received a letter from the IRS requesting proof of the gift. This was the only item in her entire return the IRS wanted verification for. Unable to comply with their request, the deduction was disallowed, and she had to pay additional tax, penalties and interest.
On a $100.00 cash donation.
The moral of the story? Making donations by check or money order isn’t sinful. Doing so will save you additional taxes at audit. Take a few minutes to review your charitable giving letters to make sure they are in compliance with the law. If they aren’t, request a corrected letter, again bearing a date prior to the date you file your income tax return. I would also suggest the church or charitable organization provide corrected letters to each and every donor. It’s the decent thing to do.
Charitable giving rules, like many IRS rules, aren’t always as easy as they may appear. Take a few minutes to learn more about the charitable giving rules for cash and checks, and clothing, boats, stocks and the like, by reading IRS Publication 526 and Publication 1771.
Eustace Greaves, Jr. creates order out of client’s financial chaos using insurance, income tax planning and preparation, and sometimes, just good old divine guidance. Send him your questions, and quote requests to firstname.lastname@example.org. And whatever you do, don’t let his clients know he wrote this post when he’s supposed to be working on their returns and insurance quotes. That’s a check even his body can’t cash.