Charitable contributions have long been an area viewed by suspicion by the IRS, and with good reason. The deduction has no floor (percentage of adjusted gross income that is exempt) unlike that of the miscellaneous or medical deductions. And it invites serious abuse when attaching taxpayer-friendly market prices to lists of all the worn out and unwanted clothing and gear that are dropped unceremoniously at the local charitable goods reseller. That's why Congress mandated that non-cash gifts over $500 in value must be detailed on the return and gifts over $5000 in value come with a professional appraisal. Gifts must also be substantiated with receipts or other proof of cost to the taxpayer claiming charitable credit., as well as written acknowledgement of the gift by the charitable organization.
A Shepherdstown, WV family recently missed this memo when they claimed over $140,000 in charitable donations to a single Goodwill location in Frederick, MD. The IRS, understandably puzzled by such a large claimed donation of without any substantiation, denied the deduction. The incensed taxpayers appealed this decision to the Tax Court, presenting a meticulous accounting of all the items claimed to be donated--but no receipts, appraisals, or written acknowledgements from the charity. Not surprisingly, the Tax Court ruled in favor of the IRS, denying virtually the entire claimed amount. Adding insult to injury, the court also assessed a stiff penalty.
This story has received wide press since the Tax Court's decision, and earned a number of polemics reviewing what the rules are in making charitable donations. Such information is important, but not necessarily our focus in bringing this case to the reader's attention. One of our reasons is that the injured taxpayers are local to our Maryland offices, bringing hometown flair to our blog entry. Another reason, and perhaps the primary one, is to advise clients and readers that if you are going to plead your case to the Tax Court, consult a tax CPA or tax attorney first. It will probably save you plenty of treasure, not to mention embarrassment.
Need to ask us a tax question or get advise on a particular tax situation? Call us at 301-841-0209. You'll be glad you did!