There are over one million charities and foundations in the United States and these organizations rely on contributions to carry out their missions. The deduction on your tax return remains a nice incentive regardless of the various reasons donors contribute. Internal Revenue Code Section 170 outlines the deductibility of charitable contributions, including provisions on substantiation requirements. If substantiation requirements are not met, the deduction could be disallowed by tax court.
Code Section 170 outlines general substantiation requirements for cash donations above and below $250. For donations below $250, the requirements are pretty straight forward. A donor should maintain a bank record of the donation or have a letter from the donee stating the name of the charity, date and amount contributed. The requirements for donations greater than $250 are more rigid. Section 170(f)(8) outlines that you must have obtained a written communication at the time the tax return is filed from the charity. This document must state the amount of the donation, whether goods or services were provided in exchange for the money, and a good-faith estimate of the value of any goods or services the charity provided. If the contributions were given to a church, there must be a statement that says “goods or services received consist solely of religious intangible benefits” or a statement to that effect. Make sure you have properly substantiated your charitable contribution before you deduct it on your return.
The case of Durden, T.C. Memo. 2012-140 is an example of the IRS cracking down on substantiation requirements and shows how a minor omission of the substantiation requirements may cost you. The Durdens donated around $22,000 to their church in 2007 and were asked by the IRS to provide evidence. The Durdens gave a letter from the church along with cancelled checks which supported the amount. The IRS disallowed the deduction based on the substantiation failing to explicitly state that no goods or services were received for the contributions. The Durdens went back to the church and had them produce a letter that complied with the required statement. However, this communication was also denied because the letter wasn’t contemporaneous with the filing date of the return.
While it may be obvious that the Durdens’ contributions were legitimate, the tax code is very specific. Meeting all of the required specifications is essential. If you have questions regarding charitable contributions or the specifics of an accounting transaction, feel free to contact Ronnie Withaeger or one of the CPAs at Wallace, Neumann & Verville, LLP.