July 28, 2015

Being Charitable has its Consequences

By Gina Amarante, Manager, Tax & Accounting Services

Being Charitable has its Consequences

Donating gently used clothing, household wares, and in some cases, vehicles and larger items (just to name a few) seems like a win-win for the majority of U.S. taxpayers.Just by clearing out a closet, basement, or garage, a taxpayer can take advantage of an allowable deduction and realize tax savings for making such contributions to qualified charities, while doing a good deed for the less fortunate. Easy, right?Well, as long as you follow the rules.

Noncash contributions carry reporting requirements for the taxpayer, tax preparer and donee organization, and for the most part, they are not being followed.Who's at fault?Apparently, it's the Internal Revenue Service (IRS).A recent article in WG & L's Taxation of Exempts cites a 2012 report issued by the Treasury Inspector General for Tax Administration (TIGTA) that says the IRS's controls are not sufficient enough to ensure compliance.

Current IRS rules do not require documentation or additional forms to be submitted with a tax return claiming noncash contributions of $500 or less.A taxpayer is merely required to personally keep receipts or written records for these items.This was not an area of focus for TIGTA's report.

The report stated that in a sample of 2010 individual income tax returns claiming more than $5,000 in noncash charitable contributions, about 60% were in noncompliance.Taxpayers in that sample claimed an aggregate total of about $201.6 million in noncash contributions.What about the tax preparers who filed the returns?Aren't they supposed to request information from their clients supporting the deductions claimed?This problem is of particular concern, and will continue to be.

TIGTA's focus was on two forms, both of which must be submitted with a tax return:(a) Form 8283, “Noncash Charitable Contributions,” to be completed by the tax preparer and required when claiming a deduction for noncash contributions in excess $500, and (b) Form 1098-C, “Contributions of Motor Vehicles, Boats, and Airplanes” (or a similar attachment), required to be completed and provided by the donee organization.In some cases, required forms were not submitted at all. Common errors pertained to the overstatement of fair market values used on motor vehicles, resulting in incorrect (overstated) deductions.

The report concluded that approximately 21 million taxpayers claimed noncash charitable contributions in tax year 2011, and 20 million did so in 2012. It was TIGTA's conclusion that the errors found on 2010 returns would certainly repeat in those years.

A previous report issued by TIGTA in 2007 also found noncompliance issues with reporting requirements and cited a large number of missing required forms.Though it was recommended then that the IRS develop a plan to mitigate these problems, it was noted that the IRS had no plan to take additional action.At the time the report was issued, TIGTA also believed the IRS's threshold for examining a return with unsubstantiated charitable contribution deductions was too high.

In lieu of an actionable response from the IRS to these two TIGTA reports, it seems as though the burden falls on tax preparers.Preparers must be aware of filing requirements and advise clients accordingly to ensure that the proper documentation is present, complete and accurate, and properly submitted.

For assistance with filing requirements and to ensure proper tax compliance, contact a Marcum tax professional.