How to Lose a Charitable Deduction: The IRS Speaks

Your clients look to you for competent advice in planning their charitable giving; now imagine the horror of hearing that the gift you so carefully planned can't be deducted due to a simple paperwork mistake. Although the IRS sometimes forgives innocent mistakes, others are unforgiveable, as illustrated in a recent IRS email advice.

The IRS took a hard line with the taxpayer, who made what would otherwise qualify as a tax deductible charitable gift. The problem was that the taxpayer "failed to obtain a contemporaneous written acknowledgment" from the charitable organization. In its advice the IRS said it will deny the taxpayer's charitable deduction even if the taxpayer takes remedial measures and the charity amends its Form 990 (Return of Organization Exempt from Income Tax) to acknowledge the donation and include the information required by the Code.

Under the Tax Code, a charitable contribution deduction for a contribution of $250 or more is allowed only if the taxpayer substantiates the contribution with a "contemporaneous written acknowledgment of the contribution by the donee organization." In other words, the charitable organization must verify the details of the contribution at the time the contribution is made. Verification by the charity can't be made after the fact—for instance, at the time the taxpayer is preparing his or her tax return.

The written acknowledgment must contain specific information, including:

The amount of cash and a description of any property other than cash contributed.
A statement of whether the donee organization exchanged anything of value with the donor.
A description and good faith estimate of the value of anything given to the donor under the previous requirement.

The IRS's advice complies with a March 8, 2011 Tax Court decision holding that donee acknowledgment of a charitable contribution is necessary in order for a taxpayer to take a charitable

deduction for the donation (see Schrimsher v. Commissioner, T.C. Memo 2011-71). But the Tax Court also recognized that a contemporaneous written acknowledgment is not always necessary.

A donee acknowledgement is not necessary where a charity reports the charitable contribution directly to the IRS on a prescribed form. The problem is that the IRS has declined to provide a prescribed method or form for charities to do so. As a result, a contemporaneous written acknowledgment is a practical necessity for all sizeable charitable donations. That's why the IRS said that it wouldn't accept the charity's amended Form 990 in place of the required donee acknowledgment.

Obtaining a contemporaneous written acknowledgment isn't the only requirement for many donations. Additional requirements may apply, for instance, where a taxpayer makes a donation of a car worth $500 or more. In addition to the information required for a charitable donation of $250 or more, a donation of a car worth $500 or more requires taxpayers to submit additional information to the IRS. And contributions of more than $5,000 or more require substantially more information, including – in most cases – a qualified appraisal.

For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne's partner, AdvisorFX, for a free trial.

See also The Law Professor's blog at AdvisorFYI.