Suprising Tax Court Case Draws Hard Line on Charitable Substantiation
By: Donna M. Mullin, J.D., CPA
Imagine that you make regular contributions to your church, all by check, with most of the checks exceeding $250. You are generous, with your contributions totaling about $25,000 for the calendar year. At the end of the year, your church sends you a letter acknowledging receiving the contributions for the total amount claimed on your tax return as a deduction.
You are audited, and the IRS disallows the contribution deduction because the church's letter does not include the required statement indicating whether the donor organization provided any goods or services in consideration for the contribution.
You ask the church for a new acknowledgement letter, which includes the required statement, and the IRS rejects the second letter as not being "contemporaneous." So, you argue before the Tax Court that you have substantially complied with the requirements and should be allowed the deduction.
No one alleges that your church isn't a qualified charity, that you didn't actually make the cash contributions, or that you received anything from the church in exchange for the contributions. The surprise is that in this case the taxpayer loses the deduction for want of a single sentence in the charity's acknowledgement letter! (Durden, TC Memo 2012-140, Filed May 17, 2012)
Consider this a wake-up call to charities and donors alike. Be aware of the rules regarding substantiation of charitable contribution deductions. Obtaining the correct substantiation is the obligation of the donor; however, it is obviously good donor relations for the charities to provide adequate substantiation for their donors.
Under Internal Revenue Code Section 170(f)(8), for charitable contributions of $250 or more, a canceled check is not enough to substantiate a contribution. The taxpayer must receive from the charity a "contemporaneous written acknowledgement that states the amount contributed, whether the organization provided any goods or services in consideration of the contribution and, if so, a description and good faith estimate of the value of any goods or services provided."
To be "contemporaneous," the written acknowledgment must be obtained by the taxpayer before the earlier of (1) the date on which the taxpayer files a return for the tax year in which the contribution was made, or (2) the due date (including extensions) for filing such return.
This rule is not new. The substantiation rules were codified in 2004. What is new is the enforcement of this strict compliance requirement in a factual case where the only element lacking was a single sentence in the charity's letter.
Charities should train their staff responsible for issuing acknowledgments on the strict requirements.
Donors should carefully review acknowledgement letters for their donations in excess of $250 and, if the letter is deficient, consider extending their tax return until a compliant letter is received.