Protect Your Charitable Deduction Recently Issued Final Regulations Affect Substantiation Requirements
Charitable donors expecting an income tax deduction must obtain, maintain, and in some cases provide to the IRS specific documentation to substantiate their donation. Donors should pay careful attention to these substantiation requirements, because failure to comply can result in total loss of their charitable deduction, as demonstrated by numerous IRS Rulings and Tax Court cases. Taxpayers have been following proposed Regulations issued in 2008, which provided detailed guidance regarding what constitutes proper documentation, defining qualified appraisers and appraisals, and how to report donations to the IRS. Final Regulations were issued July 27, 2018.
By way of background, the basic substantiation requirements introduced by the American Jobs Creation Act of 2004, and expanded in the Pension Protection Act of 2006, are as follows:
- For gifts of cash or other monetary gifts, donors must retain a record of the contribution such as a bank record or written communication from the charity showing the charity’s name, date and amount of contribution.
- For gifts of non-cash property, donors must obtain a receipt from the charity and maintain records showing the charity’s name, date and description of the property donated.
- For gifts of $250 or more, in cash or property, donors must obtain a “contemporaneous written acknowledgement” from the charity, which includes the above described information, as well as a statement regarding any goods or services provided by the charity in return for the donation.
In addition to satisfying the above requirements:
- For gifts of property that are valued between $500 - $5,000, donors must include a description of the donated property on their tax return.
- For gifts of property that are between $5,000 - $500,000, donors must obtain a “qualified appraisal” and attach an appraisal summary to their tax return.
- For gifts of property that are more than $500,000, donors must attach the full qualified appraisal to the their return. There are limited exceptions applicable to gifts of marketable securities and gifts by certain corporations.
The final Regulations largely follow the existing proposed Regulations, with a few notable changes and clarifications.
- For donors giving money to charities that provide blank donation forms to be filled out by the donor, the final Regulations provide that this is not sufficient substantiation. Donors must have the charity fill out the donation date and amount received. It is not clear whether this rule applies to donations of other property (such as used household goods to your local Goodwill).
- There is a “reasonable cause” exception for failure to comply with the substantial requirements for gifts of non-cash property, which, if met, preserves a donor’s charitable deduction. The final Regulations put an end to hoped-for guidance regarding what constitutes “reasonable cause,” following the Tax Court’s position that reasonable cause will be determined on a case-by-case basis.
- IRS Form 8283 must be filed with a donor’s tax return in the year of donation for all non-cash gifts over $500. The final Regulations clarify that a fully-completed Form 8283 does not constitute “contemporaneous written acknowledgment.” This means that, in addition to having the charity cooperate with preparation of the Form 8283, donors also need to obtain a separate written acknowledgment of their gift.
- If a donor’s gift generates a deduction in excess of the donor’s charitable contribution deduction limit, and the donor takes advantage of the deduction carryover in future years, the final Regulations provide that, if an appraisal was required to be attached to the tax return in the donation year, the appraisal must also be attached to the return in every year in which the donor uses the carryover deduction.
Information related to charitable contribution substantiation requirements is available on the IRS website at: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-organizations-substantiation-and-disclosure-requirements