Charitable Deductions Under Audit: The Paperwork Rules That Decide the Case

Charitable deductions show up in audit letters all the time, usually as one of a few itemized deduction issues on a correspondence or office exam. They are among the easiest issues to win and the easiest to lose, because the result almost always depends on whether a specific document exists.

Section 170 starts with a sentence worth memorizing: a charitable contribution "shall be allowable as a deduction only if verified under regulations prescribed by the Secretary" (IRC 170(a)(1)). Then it spells out what verification means.

Cash gifts of any size: IRC 170(f)(17)

For any contribution of cash, check or other monetary gift, no deduction is allowed "unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution."

That rule has no dollar threshold. The $20 in the collection plate and the $2,000 check are both covered. In an audit, the examiner will ask for one of two things for each cash gift:

• A bank record, such as a canceled check, bank or card statement showing the charity's name, date and amount.
• A written communication from the charity showing its name, the date and the amount.

Your own list, calendar or memory does not satisfy the statute. Cash put in an envelope with no receipt is the classic loss.

$250 or more: the contemporaneous written acknowledgment, IRC 170(f)(8)

For any contribution of $250 or more, no deduction is allowed unless you substantiate it with a contemporaneous written acknowledgment from the charity. The acknowledgment must include:

• The amount of cash and a description (but not the value) of any property contributed.
• Whether the charity provided any goods or services in return.
• A description and good faith estimate of the value of any goods or services provided, or, if they consist solely of intangible religious benefits, a statement saying so.

"Contemporaneous" has a precise meaning. You must obtain the acknowledgment on or before the earlier of the date you file the return for the year of the gift or the due date, including extensions, for that return (IRC 170(f)(8)(C)).

That timing rule is why this issue is so dangerous in an audit. If you did not have the acknowledgment when you filed, getting one from the charity after the audit letter arrives may not satisfy the statute. Check your files for year-end giving statements, which often include the required language. Read the statement carefully: the "goods or services" sentence is the one most often missing.

Property gifts over $500: description with the return

For contributions of property where the deduction claimed is more than $500, IRC 170(f)(11)(B) requires you to include with the return a description of the property and other information the IRS requires. The IRS's instructions say that individuals file Form 8283 when their deduction for all noncash gifts is more than $500.

A missing Form 8283 is a frequent audit adjustment on donated clothing, household goods and vehicles. The statute provides a reasonable cause exception, discussed below.

Clothing and household items have an extra condition: no deduction is allowed unless the items are in good used condition or better (IRC 170(f)(16)(A)). Photos of donated items and a dated itemized list help prove condition and value.

Property gifts over $5,000: qualified appraisal

For property contributions where the deduction is more than $5,000, IRC 170(f)(11)(C) requires a qualified appraisal and attaching the information about the property and appraisal the IRS requires. For deductions over $500,000, the qualified appraisal itself must be attached to the return (IRC 170(f)(11)(D)).

A qualified appraisal is one conducted by a qualified appraiser under generally accepted appraisal standards and IRS rules (IRC 170(f)(11)(E)). The statute exempts readily valued property, such as cash and publicly traded securities, from the appraisal requirement.

The reasonable cause exception

For the property documentation rules in 170(f)(11), the statute says the denial of deduction does not apply "if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect" (IRC 170(f)(11)(A)(ii)(II)). If you missed a Form 8283 or an appraisal requirement, the facts behind the miss matter. Document them.

Notice what that exception does not cover by its terms: the bank record rule for cash in 170(f)(17) and the written acknowledgment rule in 170(f)(8). Those provisions have no similar language. Plan accordingly.

What the examiner will ask for

A typical IDR or correspondence request on charitable deductions asks for:

1. A list of every contribution claimed, with the charity, date, amount and type (cash or property).
2. Bank records or charity receipts for every cash gift.
3. Contemporaneous written acknowledgments for every gift of $250 or more.
4. Form 8283 and supporting records for noncash gifts over $500.
5. Qualified appraisals where required.

Organize your response in exactly that order. Put a schedule on top that totals to the amount on your return, with each line referencing its exhibit. See responding to a Form 4564.

Why estimates do not save charitable deductions

For many business expenses, a credible estimate can survive an audit under the rule from Cohan v. Commissioner. Charitable deductions are different. Section 170 sets specific documentary requirements, such as the bank record or written communication for cash gifts and the contemporaneous acknowledgment at $250, and conditions the deduction on meeting them. When the statute names the document, an estimate is not a substitute. Recordkeeping duties in general are covered in IRC 6001 recordkeeping.

How to fix this before it is an audit

• Give by check, card or electronic transfer, not cash.
• Get year-end statements from every charity before you file, and read them for the goods-or-services sentence.
• Photograph and list donated property, with condition and a reasonable value method.
• Complete Form 8283 when noncash gifts exceed $500, and get a qualified appraisal when required.
• Keep it all with the return.

Mistakes I see over and over

• Relying on a canceled check for a $250-plus gift. The check satisfies the cash recordkeeping rule, but a gift of $250 or more also needs the charity's written acknowledgment. They are separate requirements.
• Year-end statements without the goods-or-services sentence. If the statement is silent about whether you received anything in return, it may not meet 170(f)(8)(B).
• Bags of clothing with no list. No list, no photos, no condition evidence, and often no Form 8283 when the total crossed $500.
• Splitting a large property gift. The thresholds apply to the deduction claimed for the property. Treat related items consistently and get advice before assuming an appraisal is not needed.
• Cash in the plate. Without a bank record or a written communication from the charity, the statute denies the deduction.

A response outline

When the audit letter questions charitable contributions, a clean response has four parts: a schedule listing every gift with charity, date, amount and type, totaling to the return; exhibits for each cash gift (bank record or charity communication); exhibits for each gift of $250 or more (the contemporaneous acknowledgment); and, for property, the Form 8283, photos, lists and any appraisal. Number the exhibits to the schedule. An examiner can verify that kind of response in minutes.

If you are already under audit

Gather what exists before you answer. Request copies of canceled checks from your bank, ask charities for copies of statements they issued, and pull card statements. Separate the gifts you can document from the ones you cannot, and do not overclaim in your response. If the examiner disallows gifts you can later document with records that existed all along, and the balance is unpaid, audit reconsideration may be available.

Generosity is not the question. Documentation is. Have the right piece of paper for each gift, and charitable deductions are one of the quickest issues to close in any audit.