A recent court decision clarifies the IRS’ position concerning certain aspects of charitable contributions of $250 or more per donation. If you make charitable contributions, please read the following and, especially if you have not yet filed your 2011 tax return, review your charitable receipts to be sure that they qualify as a receipt under these rules.
Taxpayers have always been required to substantiate items reported on their returns. Some of the items we report on our returns are subject to special substantiation rules. This is true with charitable donations.
Contributions of cash of less than $250 must be substantiated by either a bank record, or by a receipt from the charitable organization showing the name of the organization, the date of the contribution, and amount of the contribution Contributions of cash of $250 or more must be substantiated by a receipt from the charitable organization that meets a set of fairly specific requirements, referred to here as a â€œqualifying receipt.â€
While many taxpayers assume that the acknowledgement letter or tax receipt sent to them by the charity is a sufficient record for IRS purposes, unless that document contains some â€œmagic language,â€ it will not be a qualifying receipt. Additionally, even with the qualifying language, the receipt will not be a “qualifying receipt” unless it is received timely. This last point was driven home in a recent tax court decision.
To be a qualifying receipt, the document must:
- State the amount of cash and/or property contributed;
- Indicate whether the charity provided any goods or services in return for the contribution, even if none were provided;
- Provide a description and good faith estimate of any goods or services provided to the donor or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
- Be received prior to the earlier of the filing of your tax return or the extended due date of the return.
These rules have been part of the law for many years; you probably have heard these rules discussed before. What is new, and what has prompted us to reemphasize these substantiation rules, is a recent tax court case that has emphasized the last of the above bulleted substantiation rules.
Recent Court Case
In the case of David P. Durden et ux. v. Commissioner; T.C. Memo. 2012-140: No. 17441-09, the taxpayers were denied a deduction for most of their charitable contributions to their church. They had to pay additional tax, plus penalties and interest. Although they had receipts which were received before they filed their return, these receipts did not include the “magic language.” In essence, these receipts met the first and fourth bulleted items above, but not the second or third. Hence, they were not qualifying receipts.
During the audit, the taxpayers attempted to correct this. They obtained new receipts which contained the “magic language,” and provided them to the IRS examining agent. But, the IRS still disallowed the charitable deductions. The taxpayers protested this treatment and, ultimately, the U.S. Tax Court ruled in favor of the IRS. The court held that once the time period for receiving the qualified receipt expired, the charity could no longer give the taxpayers a qualifying receipt. Without a qualifying receipt, the law was clear; no deduction.
We expect that the IRS will react predictably to this decision. In an audit, expect that the agent will ask for your charitable deduction receipts; expect a focus on the “magic language” and the date on which you received the receipt (not the date typed on the receipt).
To protect your deduction, you should:
- Make certain that you have receipts for all contributions of $250 or more.
- Make all contributions by check or credit card (but, if you give cash for contributions of less than $250, get a receipt).
- Make sure that all your receipts are “qualified;” check for the “magic language.”
Finally, in an abundance of caution, keep the envelope in which the receipt was mailed. Although the receipt may show a date, that date does not prove when you received the receipt. The envelope postmark or meter stamp will give additional evidence concerning when you received the receipt.
For everyone who has already filed their 2011 return, it is too late to get replacement qualifying receipts. However, for those of you who are on extension and have not filed, it is not too late to remedy this problem; get the charity to issue a qualifying receipt before you timely file your return.
We know that most charities provide qualifying receipts. But we also know that some do not. We are happy to discuss this issue with such charities. So, for our clients, if you are unable to obtain a qualifying receipt from a charity, let us know; we can try calling to explain the importance of the â€œmagic language.â€ Please do not hesitate to contact us if you have questions concerning this matter.