Key point. Taxpayers are subject to substantial penalties for not filing a tax return (if one is required) and for reporting inaccurate information on a tax return. Some taxpayers view the risk of being audited as so low that they deliberately underreport income, overstate expenses, or adopt questionable interpretations of the tax laws. You should bear in mind the following penalties before adopting aggressive tax positions.
The United States Tax Court ruled that a taxpayer was not entitled to deduct charitable contributions made to her church because the church’s receipt was defective. A taxpayer made several donations to her church in 2009, many of which were for more than $250. The donations were recorded in the church’s financial records. In 2014, after the IRS audited the taxpayer’s 2009 tax return and questioned contributions of $250 or more that she had made to her church, the church sent her a letter certifying that she had made $3,230 in contributions to the church in 2009. The IRS denied this deduction, and the taxpayer appealed to the Tax Court.
The Tax Court began its opinion by observing:
Contributions of cash or property of $250 or more generally require the donor to obtain a contemporaneous written acknowledgment of the donation from the donee. At a minimum, the contemporaneous written acknowledgment must contain a description of any property contributed, a statement as to whether any goods or services were provided in consideration by the donee, and a description and good-faith estimate of the value of any goods or services provided in consideration. A written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of (1) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (2) the due date (including extensions) for filing such return.
The IRS insisted that canceled checks for donations of $250 or more and the written statement from the church were insufficient to substantiate her contributions. The court agreed: “The canceled checks do not qualify as contemporaneous written acknowledgments because they do not state whether the taxpayer received any goods or services in exchange for her contributions. Additionally, the written statement from the church does not qualify as a contemporaneous written statement because it was written more than four years after the taxpayer’s tax return had been filed.”
The Tax Court also affirmed the IRS’s imposition of a “negligence penalty” upon the taxpayer. The tax code allows the IRS to assess a penalty of 20 percent of the amount of an understatement of taxes that is due to negligence. Negligence includes (1) failure to make a reasonable attempt to comply with the tax law; (2) failure to exercise reasonable care in the preparation of a tax return; or (3) failure to keep adequate records or to substantiate items properly. Reliance on the advice of a tax adviser does not relieve the liability for a negligence penalty.
Taxpayers can avoid the negligence penalty only “with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.” The Court upheld the assessment of this penalty on the taxpayer: “The IRS satisfied its burden of production with regard to negligence. It established that the taxpayer … did not substantiate several items properly … . Accordingly, we hold that the taxpayer is liable for a penalty.”
What This Means For Churches:
This case illustrates the consequences that can result from a church’s failure to comply with the substantiation requirements for charitable contributions. Those requirements are stricter for contributions of $250 or more, and, as this case demonstrates, require the written acknowledgment (receipt) provided by a charity to donors to be contemporaneous and include a statement indicating whether the charity provided goods or services to the donor in consideration of the contribution. If goods or services were provided, the church’s written acknowledgment must provide a description and good faith estimate of the value of those goods or services, or, if only intangible religious benefits were provided, a statement to that effect.
Churches that fail to provide donors with a proper acknowledgment are jeopardizing the deductibility of donors’ contributions.
On many occasions the IRS and the Tax Court have stressed that whether or not a donor actually made a donation is irrelevant. What matters is strict compliance with the technical substantiation requirements imposed by the tax code. When it comes to the substantiation of charitable contributions, it is form over substance.
This case also illustrates that a church’s failure to provide donors with valid acknowledgments of their contributions may result in the IRS assessing a negligence penalty. Beaubrun v. Commissioner, T.C. Memo. 2015-217.
Key point. The income tax regulations clarify that separate contributions of less than $250 are not subject to these additional requirements “regardless of whether the sum of the contributions made by the taxpayer to a charity during a taxable year equals $250 or more.”
Tip. Be alert to any donation of noncash property that may be valued by the donor at more than $500. Be sure the donor is aware of the need to complete Section A of Form 8283 for donations of property valued at more than $500 but not more than $5,000, and Section B of Form 8283 for donations of property (other than publicly traded stock) valued at more than $5,000. The instructions to Form 8283 contain a helpful summary of the substantiation requirements that apply to these kinds of gifts. Different rules apply to donations of vehicles. Failure to comply with these rules may lead to a loss of a deduction. It is a good practice for churches to have some of these forms on hand to give to donors who make contributions of noncash property.
Substantiating Contributions of $250 or More—a Summary
Section 170(f)(8) of the tax code imposes special substantiation requirements for individual contributions of $250 or more:
(A) No deduction shall be allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the [charity] that meets the requirements of subparagraph (B).
(B) An acknowledgement meets the requirements of this subparagraph if it includes the following information:
(i) The amount of cash and a description (but not value) of any property other than cash contributed.
(ii) Whether the [charity] provided any goods or services in consideration, in whole or in part, for any property described in clause (i).
(iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. For purposes of this subparagraph, the term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction [e.g., worship services, teaching, and sacraments].
(C) An acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of (i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (ii) the due date (including extensions) for filing such return.
