Documenting Charitable Contributions for Income Tax Deductions

January 23, 2017 § Leave a comment

As you begin to gather your information in order to prepare your tax return, it is a good time to review the record keeping requirements for deducting charitable contributions. The IRS rules for substantiating deductions for charitable contributions are strict.

There are a few general tiers of gift amounts which require different levels of documentation in order to make sure a deduction is adequately substantiated. Regardless of the dollar amount, it is always best to keep as many timely records as possible.

A donor will not be allowed any deduction for a contribution of cash, by check, or any other monetary gift regardless of the amount unless the donor retains either (1) a bank record that supports the donation or (2) a written receipt or communication from the charity showing the name of the donee organization, date, and amount of the contribution.

Charitable cash handouts – such as cash placed on church collection plates – will not result in any deductions unless the donor obtains a qualifying receipt or written communication.

charitable-donationsDonors must get a written acknowledgment from the charity if the value of the contribution (in cash or other property) is $250 or more – a cancelled check or other reliable records are not sufficient proof. (The taxpayer can obtain one written acknowledgement for multiple gifts of $250 or more to the same charity.) The acknowledgment must be obtained no later than the due date (or extended due date, if applicable) of the tax return for the year the contribution was made. If the return is filed before the due date, the donor must possess the acknowledgment when the return is filed. If the required written acknowledgment is not properly completed and timely obtained, the charitable contribution can be disallowed in its entirety.

If a taxpayer gives cash, the amount should be noted on the acknowledgement. If the gift is property, the acknowledgment must describe the property, but the charity does not have to value it. (Determining the value of the property is the responsibility of the donor.) Gifts of property must be in “good” condition in order to be claimed as deductions. It is a good idea to take a picture of the property that is being donated and keep it with your tax records in the event you have to substantiate the deduction in the future.

The written acknowledgement must also contain a statement of whether or not the donee organization provided any goods or services in consideration, in whole or in part, for any of the cash or other property transferred to the donee organization. If a donor received anything from the charity in return, the acknowledgement must include a good faith estimate of the value of the goods and services the donor received (for example, the value of a charity dinner dance or athletic event tickets) and a disclosure that only the “net” amount is deductible. If only intangible religious benefits (for example, admission to a religious service) are received, the acknowledgment should so indicate, and no valuation of such benefits is required.

When a taxpayer donates property value at more than $500, Form 8283 must be attached to the return. The taxpayer must also keep written records that include:

  • a written receipt of letter from the charitable organization showing the organization’s name, the date and place of the contribution, and a detailed description of the property; or
  • if it is impractical to obtain a receipt, reliable written records containing the following information:
    • the organization’s name, the date and place of the contribution, and a detailed description of the property
    • the fair market value of the property at the time contributed
    • the property’s cost

A donor who contributes property, other than publicly traded securities, valued at more than $5,000 during the tax year must obtain a qualified written appraisal and attach to his or her return a completed Section B of Form 8283 signed by the appraiser and the donee organization.

As indicated previously, the IRS rules for substantiating deductions for charitable contributions are strict. There are many court cases where charitable contributions have been denied (and in some cases penalties imposed) where the substantiation requirements were not met.

If you have question concerning the document rules, please contact one of our firm members at (515) 288-3279 in West Des Moines or (515) 462-1882 in Winterset.

Dave Hurst, CPA
Dave Hurst
Partner – McGowen, Hurst, Clark & Smith, P.C.

Tax Season Changes to Be Aware of & Possible Refund Delays

January 17, 2017 § Leave a comment

The IRS has implemented some new restrictions for 2016 individual income tax returns filed in 2017 to help prevent paying fraudulent refunds.  The information below summarizes a few of these significant changes which may alter the timing of some refunds as well as the documentation taxpayers will need to provide to their paid preparers.

The filing season for individual tax returns begins Monday, January 23. With one of the new rules for this filing season, the IRS is now required to hold refunds for any tax returns claiming an earned income credit or additional child tax credit until February 15, 2017.  This delay is designed to provide additional time to review the returns before issuing the refunds related to these credits.

irsThe earned income credit is a refundable credit that provides a benefit for low to moderate income individuals that is calculated based off your income level and household size.  Individuals will need to have income from salaries, wages, tips, self-employment income or other qualifying sources to qualify for the credit.

The additional child tax credit represents a portion of the child tax credit that is refundable for certain taxpayers.  It is calculated based on various factors but typically helps increase tax refunds for those taxpayers with children and low to moderate incomes.

The IRS still expects to issue most refunds within twenty-one days of filing even with the new hold back requirement.  In addition to holding back certain refunds, the IRS has implemented new due diligence requirements for tax return preparers.  These new requirements apply to all returns claiming a child tax credit, additional child tax credit or the American Opportunity education credit.  Any taxpayers who have dependent children and use a preparer to complete their tax returns can expect additional questions this filing season in order to complete their return.

Tax return preparers will now be required to complete Form 8867 – Paid Preparer’s Due Diligence Checklist documenting that taxpayers provided evidence to support claiming the credits mentioned above.   Preparers must maintain adequate records documenting how information was obtained and the identity of the person supplying the information used to prepare the return to avoid penalties.

An additional change for the 2017 filing season is the due dates for any form 1099’s with box 7 nonemployee compensation.  Traditionally, Copy A of the form 1099’s that are filed with the IRS has been due at the end of February.  The new due date for Copy A for the form1099’s with box 7 nonemployee compensation is now January 31.

The IRS is continually trying to limit the amount of fraudulent refunds that are issued with a wide variety of changes, and we can expect that more changes are very likely in the future as well.  Do not hesitate to reach out to one of our firm members if you have any questions.

Nathan Beck, CPA
Nate Beck
Senior Manager – McGowen, Hurst, Clark & Smith, P.C.

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