The Raleigh Small Business Tax Blog

When you take a charitable donation as a tax deduction are you sure it would pass an IRS audit?

It’s critical to remember that tax deductions are allowed only when the tax laws are followed and proper documentation is available. A recent Tax Court case dealing with tax deductions for charitable contributions emphasized this important point.

A Tax Court Case to Learn From

The IRS, the taxpayer, and the Tax Court all verified that checks totaling $6,100 were given to a qualified charitable organization. Each of the checks were for amounts larger than $250. However, the IRS argued the taxpayer’s deduction was invalid because the taxpayer did not have proper documentation for the charitable donations.

The law defines in order to claim a deduction for a charitable contribution of $250 or more, a contemporaneous written acknowledgment must be received from the charity. In addition, the law stipulates in order for an acknowledgment to be contemporaneous, it must be provided to the donor before she files a return for the tax year in question or before the due date (including extensions) for filing the return, if earlier. It must also indicate whether the charity provided any services or goods in consideration for the donation.

In this case, the taxpayer prepared their 2005 return in April 2006 and claimed their deduction based only on their canceled checks. They were subsequently audited by the IRS and these deductions were denied because of lack of acknowledgment from the charitable organization.

The charity provided a written acknowledgment to the taxpayer during the audit which took place in 2008. The IRS, however, continued to deny the deduction since the acknowledgment from the charity was not contemporaneous. The Tax Court sided with the IRS since the proper acknowledgment was not received prior to the taxpayer’s filing date in 2006 for the 2005 tax year. The taxpayer was denied a $6,100 deduction.

Required Documentation for Charitable Contributions

If you have made charitable donations of $250 or more, follow up with the charity to make sure you get the proper acknowledgment on a timely basis. This is required for the deduction to survive an IRS audit. For contributions smaller than $250, a canceled check or credit card receipt is okay. However, it is always best to have an acknowledgment from the charity for your tax preparation process.

Making a charitable contribution is an excellent thing to do. We encourage you to support local Raleigh charities such as a food bank or a local shelter.