In recent years, the Internal Revenue Service (IRS) has taken a hard line regarding the substantiation of non-cash charitable contributions to reduce fraudulent appraisals and deductions.
To deduct donations of cash or property (non-cash items such as clothing or household items) as itemized deductions on your individual income tax return, there are certain substantiation rules. These rules depend on what you are donating and how much. For any contribution of $250 or more, you must obtain a “contemporaneous written acknowledgement” from the registered charitable organization to which you are making the donation and that acknowledgement must contain certain language. The acknowledgement must state the amount of cash or a description of the property contributed, whether the organization has provided any goods or services in return for the contribution, and a “description and good faith estimate of the value of any goods or services.” The IRS loves this rule and more information is available in a previous blog.
Larger contributions (over $500, over $5,000, or over $500,000) require additional substantiation. Non-cash contributions exceeding $500 require that individuals keep written records establishing when and how the items were acquired as well as the cost, and how they determined the fair market value (FMV) of the items donated.
Naturally, contributions over $5,000 or $500,000 require the most substantiation - a “qualified appraisal.” Both “qualified appraisal” and “qualified appraiser” are explicitly defined in the IRS regulation. The qualified appraisal is “conducted by a qualified appraiser,” in writing and signed by the appraiser. It must be attached to your tax return. The “qualified appraiser” is an individual who meets certain educational requirements, performs appraisals regularly and in accordance with IRS regulations and guidance, and is compensated for such appraisals.
In the past, the IRS has not strictly enforced some of the substantiation criteria. For instance, if you had a cancelled check for $500, the IRS may have allowed your deduction. That is no longer the case. Not knowing these rules can be costly if your return is selected for examination and you do not have the proper appraisals and acknowledgement letters.
The Sad Case of Mr. Smith
Such was the case for Mr. Smith (yes, that’s his real name), who made contributions of personal and household items to the American Veterans National Service Foundation (AMVETS). In 2009, Mr. Smith’s mother died and he donated some of her furniture and other items to AMVETS, a registered charity. Mr. Smith valued these items at $11,730. He also donated clothing belonging to himself and his children, which he valued at $14,487. Finally, he donated certain electronic equipment that year with a value of $1,550. The total value claimed on his schedule of itemized deductions was over $27,000.
Although the Tax Court absolutely believed that Mr. Smith donated the items claimed on his income tax return, his entire contribution deduction ($27,767) was denied because he failed the substantiation tests.
Mr. Smith had not established who previously owned the electronic equipment
Blank tax receipts were obtained from the charity and filled out later (i.e., not filled out by AMVETS representatives on the date of the donation)
The FMVs used could not be substantiated, and
Appraisals were not obtained for the items valued at over $5,000.
While the charitable contribution rules may seem simple on the surface, they are complex, depending on the nature of your contribution. If you have questions or are considering contributing to your favorite charity, consult first with The TaxWarriors® at Drucker & Scaccetti. We can help! We are always prepared to help you with this or any other tax-related matter.