Each year, taxpayers turn in completed tax organizers noting amounts claimed for noncash contributions. A taxpayer generally includes doorknob hangers, or blank receipts, from charities for goods picked up from the taxpayer or dropped off by the taxpayer at the charity's location. In many instances, an amount is stated without any substantiation of how the fair market value (FMV) was determined or a list of the items donated.
Many taxpayers have no idea of the substantiation requirements in Sec. 170 and the related regulations for noncash contributions, and charities often make little effort to conform with the rules or assist taxpayers in complying with those requirements. Return preparers are unable to properly complete Form 8283, Noncash Charitable Contributions, without the proper information.
A Tax Court opinion released in April (Kunkel, T.C. Memo. 2015-71) clarifies the misconceptions taxpayers have about their charitable contributions of household items, etc., on the receipt received and the amount of deduction they are entitled to.
The following are some key facts from Kunkel:
- The taxpayers did not have a "contemporaneous written acknowledgment" from any of the charitable organizations to which they donated noncash items;
- The doorknob hangers left by the truck drivers did not satisfy the regulatory requirements because they were not dated and not specific to the taxpayers;
- The doorknob hangers did not describe the property contributed and did not contain the required information;
- The taxpayers contended that they did not need written acknowledgments because they made all of their contributions in batches worth less than $250;
- The taxpayers failed to maintain written records establishing when or how donated items were acquired or what their cost bases were;
- The taxpayers did not maintain written records establishing how they calculated the items' FMV; and
- The taxpayers failed to present credible evidence that these items were "in good used condition or better."
The factors enumerated in this case are important since the substantiation rules apply to all taxpayers and all noncash contributions. In addition, AICPA members must conform with the requirements of Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), the AICPA Code of Professional Conduct, and the AICPA Statements on Standards for Tax Services. The due-diligence requirements of Circular 230 make return preparers responsible for the amounts claimed on the return.
Most taxpayers realize that there is a tax benefit to making cash and noncash donations to a charity. However, most taxpayers are unaware of the stringent regulations that apply to the substantiation of noncash charitable contributions and do not furnish the required information for completing Form 8283 when it is necessary. Taxpayers think doorknob hangers or blank receipts are sufficient information to complete the return.
Return preparers are left to figure out how to satisfy client expectations in completing the return with the incomplete information the charities and taxpayers often furnish. Communicating to the taxpayer about the requirements and how to document the items donated becomes very important.
Form 8283 must be completed for a noncash contribution of over $500, and the taxpayer must furnish the following information about the donated property: the date it was donated; the date the taxpayer acquired it; its original cost; its FMV; and how its FMV was computed and determined. The return preparer must obtain this additional information in some form to satisfy the substantiation requirements. It is suggested the return preparer ask the taxpayer to complete a questionnaire to document the key facts about the donated items. The questionnaire could appear as shown in the exhibit below.
This should satisfy the substantiation requirements. In addition, IRS Publications 526, Charitable Contributions, and 561, Determining the Value of Donated Property, provide insight into substantiation requirements.
Categories of Noncash Contributions
Property valued at less than $250: Taxpayers must receive and keep a receipt from the charitable organization showing the name of the organization, date and location of the contribution, and a reasonably detailed description of the property. A letter or other written communication from the organization acknowledging receipt and containing the information previously mentioned will satisfy as a receipt.
Property valued at $250-$499: Taxpayers must again receive and keep an acknowledgment of the contribution from the organization. If more than one contribution of over $250 is made, the taxpayer must have either a separate acknowledgment for each or one acknowledgment that shows all contributions. The acknowledgment must meet the requirements described above for contributions of property valued at less than $250, as well as several additional requirements. These additional requirements are that the acknowledgment must be in writing, include a description of the property donated, state whether the qualified organization gave any goods or services as a result of the contribution, and include a description and good-faith estimate of the value of any goods and services given. This acknowledgment must be received by the taxpayer on or before the earlier of the date the return for the year of the contribution is filed or the due date, including extensions, for filing the return.
The taxpayer must also keep reliable written records for each item of contributed property that include the following information:
- The name and address of the organization to which the taxpayer contributed the property;
- The date and location of the contribution;
- A detailed description of the property that is reasonable under the circumstances;
- The FMV of the property at the time of the contribution and how the taxpayer determined the FMV (if the property was appraised, the taxpayer should keep a copy of the signed appraisal);
- The cost or other basis of the property, if the taxpayer must reduce its FMV by appreciation—these records should include the amount of the reduction and how the taxpayer calculated it;
- The amount the taxpayer is claiming as a deduction for the tax year as a result of the contribution; and
- The terms of any conditions attached to the contribution of property.
Property valued at $500-$4,999: Taxpayers must have the acknowledgment and written records described above for contributions of property valued at $250-$499. Additional information the taxpayer needs for his or her records for these contributions includes how the property was acquired (purchase, gift, inheritance, etc.), the date the property was received by the taxpayer, and the property's cost or basis.
Property valued in excess of $5,000: In addition to the items needed for contributions valued at $500-$4,999, the taxpayer must obtain a qualified appraisal of the item.
One is still left with taxpayers' perception that the doorknob hangers are all that are needed to claim noncash contributions. Charitable organizations that collect noncash items do not assist with communicating what is the proper documentation to claim the deduction and, in some instances, may even mislead taxpayers.
Communicating the documentation requirements for noncash contributions in newsletters and tax organizers may assist return preparers in satisfying their responsibilities for the figures claimed on returns.
Valrie Chambers is an associate professor of accounting at Stetson University in Celebration, Fla. Gerard Schreiber is a partner with Schreiber & Schreiber CPAs in Metairie, La. Mr. Schreiber is a member of the AICPA IRS Advocacy & Relations Committee and a former member of the AICPA Tax Practice Responsibilities Committee. For more information about this column, contact Prof. Chambers at firstname.lastname@example.org.