Form 8283 and Form 1098-C are classic examples of the painstaking forms with which we need to be familiar. And all those rules –they can be mind-numbing.
Seasoned tax preparers may remember the days when accepting a taxpayer’s “estimate” of charitable contributions to a church could be as easy as the taxpayer saying, “I gave $10 per week to the church.” No receipts, no acknowledgement from the church, and no checks were proffered. A similar case could be made for noncash contributions – new or used clothing, vehicle donation, boat donation.
Sadly, these days are gone, with the acceptance of one’s word being replaced by additional forms and rules. Form 8283 (Noncash Charitable Contributions) and Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes) are classic examples of the painstaking forms with which we need to be familiar. And the rules – they are mind-numbing. We have to be familiar with the size of the cash or noncash donation – is it more or less than $250, or $500, or $5,000? Are there receipts? Do they have the requisite information: name of the charity and the donor, date of donation, value of the donation, description of the property donated, statement of “no goods or services provided in exchange,” receipt prior to the filing of the tax return or due date including extensions and, if applicable, the value of goods or services provided by the charity stating that the deduction may be limited?1
A Bit of History
Before we wade too deep in the weeds, it may be helpful to take a step back and examine the genesis of tax deductible charitable donations. On October 3, 1913, President Woodrow Wilson signed the United States Revenue Act. The Act re-imposed the federal income tax and formally started the era in which tax policy regulated philanthropic activities and charitable giving. The new law exempted institutions “organized and operated exclusively for religious, charitable, scientific, or educational purposes” from paying income taxes. Later acts added “prevention of cruelty to children and animals, literary, community chest, fund or foundation, and testing for public safety” to the list of exempt organizations.2
Four years later, the Income Tax Law allowed taxpayers to take deductions of contributions to charitable and certain other nonprofit organizations up to 15 percent of their taxable income. (In 1935, the government began permitting corporations to deduct philanthropic contributions up to 5 percent of taxable income; this percentage increased to 20 percent in 1952.)3
A charitable deduction extended the benefits of exemption to individual taxpayers so that income donated to charitable organizations was exempted from all levels of income taxation. The deduction was intended to subsidize the activities of private organizations that provide viable alternatives to direct government programs.4
Under the current federal income tax system, individuals who itemize deductions can deduct contributions to certain organizations operated for religious, charitable, scientific, literary, or educational purposes. The list also includes domestic government entities, fraternal societies, organizations that prevent cruelty to children and animals, and several other types of socially beneficial organizations. These organizations must be operated in a nonprofit form and are subject to other restrictions.5
To give the reader a sense of proportion, the National Center for Charitable Statistics stated that in 2014 charitable giving amounted to $358.38 billion. Individuals gave over $258 billion. Interestingly, giving by individuals has more than doubled since 1984.6
So why all of the regulations and subsequent paperwork? In a 2004 USA Today article, “Don’t be more charitable than the IRS likes,” Thomas A Fogarty fairly well predicted that the next big thing in income tax enforcement—cracking down on excessive deductions of property donated to charities—would be coming.7
Almost as if a fulfillment of a prophecy, the IRS released a proposed rule on charitable gift substantiation which was designed to help the IRS verify the amount of charitable deductions claimed by taxpayers. The proposal would have permitted, but not required, charities to file a new information return by February 28 of every year, in addition to filing 990-series forms. Charities choosing to participate would have filed an additional form with the IRS that included taxpayer identification numbers or social security numbers for donors who contribute $250 or more. Charities also would have been required to provide each donor a copy of their individual information that was included on the form.
The response to this proposal was swift and widespread. Not only did the Independent Sector and National Council of Nonprofits convene over 200 sector groups, the House Ways and Means Committee member Peter Roskam (R-IL) expressed to reporters, “The IRS has not demonstrated its capacity to hold this type of information from [a] confidentiality and a security point of view.” He further expressed doubt that charities could protect the information they obtain from donors, pointing out that large for-profit companies have experienced data breaches.8
The US Government Accountability Office (GAO) released a study in May 2009 entitled, “Requiring Information Reporting for Charitable Cash Contributions May Not Be and Effective Way to Improve Compliance.” Among its many observations are:9
- With a dollar threshold exemption, charities would likely need to collect information for all donors upon first receiving donations because charities would not know if their donors’ gifts would eventually exceed the established threshold
- Taxpayers may reduce giving because they are reluctant to provide Social Security numbers to charities given concerns over identity theft
- Many charities rely on volunteers, to whom donors may not want to provide their Social Security numbers
- Charities could incur substantial costs and burdens if information reporting were required for cash contributions
- Taxpayers may not want the federal government to know to which charities they donate
- Privacy concerns may be particularly relevant for donations to religious organizations
- Currently, anonymous donors can receive substantiation letters from recipient charities through representatives on the donors’ behalf
- It may not be possible for taxpayers to deduct anonymous donations if information reporting were required10
After pushback from the charitable sector as well as from a number of lawmakers, the Internal Revenue Service in January 2016 withdrew a rule proposed in September to create an alternative method of substantiating charitable donations of $250 or more.
Over the years the forms used to verify charitable contributions (Form 8283, [circa 1985] and Form 1098-C, [circa 1995]) have increased in complexity. However, this has not deterred taxpayers from using them. The issue is really the misuse or non-compliance with the form instructions by some taxpayers. In an audit released by the Treasury Inspector General for Tax Administration (TIGTA) on December 20, 2012, TIGTA concluded that
“IRS controls are not sufficient to ensure taxpayers are complying with noncash charitable contribution reporting requirements. Statistical samples of Tax Year 2010 tax returns that claimed more than $5,000 in noncash charity contributions showed that approximately 60 percent of the taxpayers did not comply with the noncash charitable contribution reporting requirements. These taxpayers claimed noncash contribution totaling approximately $201.6 million. Taxpayers who donate motor vehicles must attach a Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, to their tax returns. However, the IRS is still not effectively identifying taxpayers who are not complying with reporting requirements for donations of motor vehicles. A match of the Forms 1098-C submitted with tax returns processed as of December 31, 2011, to those submitted by charities identified 35,846 tax returns with motor vehicle claims totaling approximately $77 million where no Form 1098-C was filed by the charity. In addition, 1,708 taxpayers reported fair market values of the vehicles that exceeded sale proceeds by a combined total of $2.2 million.”11
It should be obvious that TIGTA recommended that the IRS expand procedures to identify tax returns claiming noncash charitable contributions that do not have a Form 8283. Additionally, the IRS should revise Form 8283 and related instructions and develop procedures to match Form 1098-C submitted with individual returns to those filed by charitable organizations.
The charitable cash contributions (reported on Schedule A – Gifts to Charity) also have their own set of rules. Basically, if there is no written record, the charitable cash contribution did not happen. For separate cash donations less than $250, acceptable documents include a cancelled check, a payroll stub, a bank record, or a receipt from the charitable organization. For all donations of $250 or greater, a written receipt or acknowledgement from the charitable organization MUST be provided. The receipt must include ALL of the following:
- The amount of cash the donor contributed;
- Whether the qualified organization gave the donor any goods or services as a result of the contribution (other than certain token items and membership benefits);
- A description and good faith estimate of the value of any goods or services (other than intangible religious benefits); and
- A statement that the only benefit the donor received was an intangible religious benefit, if that was the case. The acknowledgment does not need to describe or estimate the value of an intangible religious benefit. An intangible religious benefit is a benefit that generally is not sold in commercial transactions outside a donative (gift) context. An example is admission to a religious ceremony.
- The donor must receive the acknowledgment on or before the earlier of (1) the date he files his return for the year he makes the contribution; or (2) the due date, including extensions, for filing the return.12
Numerous tax court cases attest that the IRS is very strict about these requirements (see Appendix A). Basically, the IRS is winning these cases on a “technical procedure,” but the rules are very easy to understand. Tax preparers should make it part of their “due diligence” to verify that all of these elements are present on any individual charitable contribution that equals or exceeds $250. The alternative may include unhappy tax clients and/or penalties.13
The Rules of Contributions
Let’s review what we know so far. In order to take advantage of any charitable contribution (cash or noncash), you must be able to use Schedule A. For cash contributions, the rules are not as complex as for noncash contributions.
A receipt, cancelled check, end of year paystub, or other written notice is required for all cash contributions less than $250. This simply means that the $100 you put in the Red Kettle during the Christmas season is not a donation unless you have written verification.
For cash contributions that are $250 or more, a detailed acknowledge, receipt, or other acknowledgement must be received. Cancelled checks alone will not work. Neither will receipts or other acknowledgements if they do not conform to the written instructions (supra). Court cases have proven over and over again, the rules are there for a purpose.
For noncash contributions, up to $500 can be donated without Form 8283 or Form 1098-C. Above this amount these forms are required to be completed correctly and attached to the taxpayer’s tax return.
For amounts of $501 to $5,000, Form 8283 must be used. In Part 1, the following additional information must be provided:
- Name and address of the donee organization,
- Description of the donated property,
- Date of contribution,
- Date acquired by the donor,
- Donor’s Cost or adjusted basis,
- Fair market value, and
- Method used to determine the fair market value.
The items donated must be in “good or better condition” at the time of the donation.Interestingly enough, public traded securities can be listed in this section even if it exceeds $5,000. An observation is in order at this point. If a taxpayer has highly appreciated securities, it is best to donate the securities rather than sell and give the proceeds after taxes. On the other hand, suppose a taxpayer has securities which have taken a tumble and the taxpayer wishes to be rid of the securities. In this case, the taxpayer should sell the securities, keep the capital loss, and donate the proceeds.14
For noncash donations of $5,000 or more, in addition to the information required above, a written appraisal from a qualified appraiser is required. Generally, you do not need to attach the appraisals to your return, but you should keep them for your records. A couple of common exceptions to the attached appraisal includes art in excess of $20,000 or any single item of clothing or household items that is not in good used condition for which you deducted $500 or more. The appraisal is required whether the donation is reportable in Section A or Section B.15
For the noncash donation of vehicles (a qualified vehicle is any motor vehicle manufactured primarily for use on public streets, roads, and highways; a boat; or an airplane) with a claimed value of more than $500, the instructions are a bit more involved. Additionally, Form 1098-C must be furnished by the donee organization contemporaneously (no later than 30 days after the date of sale or the date of the contribution.
There is a decision tree to consider to determine the deductible value for the donor. How will the donated vehicle be used: sold at auction, used materially in the furtherance of the donee organization charitable purpose, sold or transferred to a needy individual for significantly below fair market value, or retained to make material improvements?
- If the vehicle is sold at auction, the deduction is the greater of the sales price or $500.
- If the vehicle is used by the donee organization for charitable purposes, the deduction would be the fair market value. For example, if delivering meals is an activity regularly conducted by the organization, the consideration would be driving the vehicle every day for one year or driving the vehicle at least 10,000 miles or more over a 1-year period.
- When the charity intends to make a “material improvement” to the vehicle, which is “anything that increases the car’s value and prolongs its life,” the fair market value can be used.
- The taxpayer can also use the fair market value when the charity gives or sells the vehicle to a needy individual at a price significantly below fair market value, and the gift or sale is part of the charity’s mission of helping the needy who need transportation.16
A final option to rid yourself of the car and receive a charitable donation is to sell the car yourself and donate the cash. Note that the rules for a “cash” donation come into play at this point.
There are other noncash charitable donations. These could include land, buildings, a scenic overlook, donation of services, taxidermy, patents, and other noncash items. Space does not allow a discussion of these noncash items, but beware that substantial value of the assets begs substantial compliance to all of the rules as described in the tax instructions. Many taxpayers have lost their deduction because they did a “short cut” of the detailed instructions.
Crowdfunding and Contributions
If you are familiar with crowdfunding, you will want to watch carefully donations claimed by taxpayers for various medical appeals using various crowdfunding platforms. There are crowdfunding platforms designed for charitable organizations. However, some of these platforms are offering gifts in exchange for contributions.17 The concern is multi-faceted. Is the charitable donation going to a reputable charity or an individual? Is the charity a not-for-profit 501(c)(3) organization? What is the value of the gift given to the donor? If the donation is given to an individual, it is almost certain that the individual is not a charitable organization and no deduction will be allowed.
There are crowdfunding platforms being used by reputable charitable organizations. Do your homework. Also advise your clients of the potential for fraud associated with such donations.
Charitable contribution documentation rules are complex and present a hazard for donors who are noncompliant, even in small ways. As tax preparers, we have a considerable responsibility to keep our clients informed of charitable donations and the right way to accomplish that desire.18
Appendix A: Select Tax Court Decisions
re: Cash Donations
As an example of the “technical nature” of cash donations, consider the following:
In Castleton v. Commissioner, T.C. Memo 2005-58, the Tax Court denied a charitable contribution deduction for various reasons including that the receipt failed to state whether the donee provided goods or services.
In Kendrix v. Commissioner, T.C. Memo 2006-9, the Tax Court denied a charitable contribution deduction because the receipt failed to state whether the donee provided any goods or services in consideration.
Harrell v. Commissioner, T.C. Summary Op. 2006-165, the taxpayer’s contributions were reduced from $10,953 to $2,550. The court did not find the taxpayer’s receipts credible.
Daniel Gomez et ux. v. Commissioner; T.C. Summ. Op. 2008-93; No. 13167-07S (30 Jul 2008), pertains to a series of donations for which the donor had canceled checks. The church that was the donee issued a late acknowledgement letter just prior to trial. Nonetheless, the Tax Court applied a strict compliance test to the requirement for a contemporaneous separate substantiation letter. However, cancelled checks, all of which were less than $250, were nonetheless allowed.19
In Joyce Ann Linzy v. Commissioner, T.C. Memo 2011-264, the Tax Court denied a charitable contribution deduction because the receipt failed to state whether the donee provided goods or services. In addition, the acknowledgement letter was not received by the earlier of the filing of the tax return or its due date of April 15, 2008.
Durden v. Commissioner, T.C. Memo 2012-140, the Court prevented a married couple from claiming $25,000 in charitable deductions. The donations had been made to a church in various amounts throughout 2007. The Internal Revenue Service initially disallowed the deductions, so the taxpayers responded by producing records of their donations, which included a January 2008 letter from their church acknowledging the donations.
Unfortunately, the 2008 letter did not include any statement that the church had not provided goods or services to the taxpayers in return for their donations. Because applicable tax laws specifically require such a statement, the IRS rejected the 2008 letter as an adequate acknowledgment of the donations.
In response, the taxpayers obtained a June 2009 letter from the church that included the required statement; however, the IRS rejected the 2009 letter as untimely. The IRS based their decision on a specific tax law that requires taxpayers to receive acknowledgments from charities by the date on which they file their returns for the year the deduction is claimed, or by the return due date, including any extensions, whichever occurs earlier. In this instance, the 2009 letter was received by the taxpayers well after the return was filed in 2008.
The taxpayers attempted to argue that they substantially complied with the rules, but the Court disagreed, stating that they could find no provision in the relevant laws allowing for substantial compliance. As a result, the Court upheld the IRS’s decision to disallow the charitable deductions.20
Jolene M. Villareale v. Commissioner, T.C. Memo. 2013-74; No. 18616-11. Income tax charitable contributions denied for an individual who founded an animal rescue organization because she failed to provide herself with contemporaneous written acknowledgments from her own organization for her contributions.21
Kunkel v. Commissioner, T.C. Memo, 2015-71, taxpayers claimed $42,455 in charitable deductions. Of this amount, $5,410 represented alleged cash contributions. The IRS determined that taxpayers had substantiated $4,840 of the cash contributions. The taxpayers also donated noncash items to four separate charities in the amount of $37,315. Taxpayers were unable to provide receipts or an acknowledgement. There were no photographs, or lists of items donated credibly to any of the four charitable organizations. The court disallowed all noncash donations.22
About the Author
Delmar C Gillette, BA, MA (Teaching) is owner of Coastal Tax Preparation and Planning, LLC. A former public school teacher in NC and VA, he has used his teaching skills for tax organizations for the past three decades. Author of various topics ranging from charitable contributions to salons – Schedule C or Schedule E, he writes to bring awareness of the peculiarities of our current tax laws to fellow tax practitioners.