To the chagrin of the charitable organization community, the Internal Revenue Service (IRS) issued new reporting rules introduced in the fall of 2015. Those proposed regulations were intended to implement the exception to the “contemporaneous written acknowledgement” requirement for substantiating charitable contribution deductions of $250 or more.
The proposed regulations provided a new option for substantiating charitable contributions under which the recipient charity may elect to file a return with the IRS that includes certain required information. Under these rules, the charity’s return must provide: the charity’s name and address, the donor’s name and address, the donor’s taxpayer identification number, the amount of cash and a description (but not necessarily the value) of any property other than cash contributed, whether the charity provided any goods or services in consideration for the contribution, and a description and good faith estimate of the value of any goods or services provided by the charity.
These proposed requirements were strongly contested. The IRS admitted that it had received a “substantial number of public comments” in response to the proposed regulations. The government’s portal for comment submissions shows it received almost 38,000 comments – the vast majority of which appear to strongly oppose the rules. Many commenters objected to the requirement to obtain and maintain donors’ taxpayer identification numbers, which posed a threat of identity theft. They also expressed concern that having to provide a Social Security number to the charity would discourage many potential donors.
Earlier this month, the IRS announced that it is withdrawing these proposed regulations. Although the procedure would have offered an exception to the contemporaneous written acknowledgment requirement, the proposed regulations were deemed too controversial.
Although not new, there are certain IRS substantiation requirements that, merit ongoing taxpayer consideration to ensure that the charitable contributions are defendable.
For all cash, check, electronic funds transfers, credit card charges, or other monetary contributions of any amount made in taxable years beginning after August 17, 2006, the donor must obtain and keep a bank record or a written communication from the donee as a record of the contribution. Written records prepared by the donor (such as check registers or personal notations) are no longer sufficient to support charitable contributions.
Bank records for this recordkeeping requirement include bank or credit union statements, canceled checks, or credit card statements. They must show the date paid or posted, the name of the charity, and the amount of the payment. Taxpayers who claim charitable contributions made by payroll deduction can satisfy the recordkeeping requirement if the donor has (1) a pay stub, Form W-2, or other document furnished by the employer that states the amount withheld for payment to charity, and (2) a pledge card or other document prepared by or at the direction of the charity that shows the name of a donee.
A donor claiming a deduction of $250 or more is also required to obtain and keep a contemporaneous written acknowledgment for a charitable contribution. This is a critical element of protecting the tax deductibility of a charitable contribution.
To be contemporaneous, the written acknowledgment must generally be obtained by the donor no later than the date the donor files the return for the year the contribution is made. The written acknowledgment must state whether the donee provides any goods or services in consideration for the contribution. If the donee provides goods or services to the donor in exchange for the contribution (a quid pro quo contribution), the written acknowledgment must include a good faith estimate of the value of the goods or services. The donee is not required to record or report this information to the IRS on behalf of a donor. The donor is responsible for requesting and obtaining the written acknowledgement from the donee. Although there is no prescribed format for the written acknowledgment, it must provide sufficient information to substantiate the amount of the contribution. For more information, see Publication 1771.
The contemporaneous written acknowledgment may be contained in the same document as the written communication from the donee used to satisfy the new cash recordkeeping requirement, as long as it contains all information required by both the recordkeeping requirement and the contemporaneous written acknowledgment requirement.
For claimed contributions over $5,000, generally a qualified appraisal prepared by a qualified appraiser must be obtained. For appraisals prepared in connection with returns or submissions for tax years beginning August 17, 2006, see Notice 2006-96.
Household items and clothing contributed to charity after August 17, 2006 must be in at least good used condition to be deductible. This requirement does not apply to contributions of food, paintings, antiques, other art objects, jewelry and gems or collections, and does not apply to a contribution of an item for which a deduction of more than $500 is claimed if the taxpayer obtains a qualified appraisal of the item.
As noted, these rules have been in place for the greater part of a decade. However, the IRS still views charitable contributions as one of the most significant areas of taxpayer abuse and regularly disallows these deductions based on a failure to meet these substantiation requirements.
For questions or comments, pleas contact Bob Grossman or Rick Dynoske at 412-338-9300.
