Don’t be complacent.
Each year tax-exempt organizations in the United States receive hundreds of millions of dollars in donations. Donors contributing to 501(c)(3) organizations are able to deduct their own contributions from their taxes, subject to IRS limitations. Recently, a higher standard deduction has been put in place through the Tax Cuts and Jobs Act. This will likely diminish the number of taxpayers and donors who itemize their deductions, making it tempting for charities to assume that receipting donations is no longer important. However, charities should continue to exercise care in receipting donations for the benefit of the donor.
Although receipting cash contributions is familiar to most charities, charities are advised to proceed with care as the IRS requires strict compliance for the donation to be claimed as a deduction. In some cases, donations of millions of dollars of charitable contributions have failed to qualify for a deduction because the contribution receipt omitted a simple phrase. This was the case for one donor who was unable to deduct a $64.5 million donation because the contribution receipt was missing the particular statement: “No goods or services were provided in exchange for the donation.”1
When providing receipts for non-cash charitable donations, there are other complications charities should be aware of. For instance, donations of tangible property–such as cars, boats, or artwork–require qualified appraisals. The donor is responsible for obtaining the appraisal, but charities need to provide substantiation of the contribution to the donor. Donors and charities would be wise to carefully evaluate what is needed to properly substantiate the donation and who is responsible for each component so that the contribution may be deducted.
Donations of real estate, securities, and conservation easements can be even more complicated. There are numerous examples of the IRS denying multi-million deductions because the charitable donations were made a few days later than they should have been or required information was missing from the substantiation materials. In one case, a contribution of real estate worth $33 million was not able to be deducted because the preparer failed to fill out one line of an IRS form asking for the donor’s basis of the real eastate.2 Even though the donor could easily prove the basis at trial, the deduction was denied because the donation was not properly substantiated when the return was filed. The IRS requires contributions to be properly substantiated at the time the donor files his or her tax return.
The IRS grants little if any leniency in receipting contributions, so charities should be extremely cautious and take time to properly receipt and substantiate cash and non-cash donations. In cases where the charity failed to properly receipt a donation, donors can be denied thousands or millions of dollars in tax deductions, which may have long lasting effects on the donations to that charity in subsequent years.
This article is provided for general information and should not be relied upon as legal advice for a specific situation. If you are in need of specific advice or legal representation, please do not hesitate to contact us.
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