Substantiation of Charitable Contributions

[Koss]

In a different thread, Gary2 wrote:

If someone wrote a check to a legitimate charity for $1000, but the receipt from the charity was lost, what do you do? Suppose the taxpayer is too embarrassed to ask the church treasurer for a copy of the receipt?

And Gretel responded:

I would not deduct. Period. Have you heard about that court case where a T/P made a substantial contribution (around $8,000) to his church but only had his cancelled checks? When audited he requested and received the receipt from the church. Guess what? IRS and Court declined deduction since T/P needs to have receipt in his hands when filing the tax return. I am not in my office now but can provide cite when there.

I'd like to see that case. I did some searching, but all I found was a case involving amounts of $8720 and $8650, where the Tax Court denied the deduction because the guy didn't produce cancelled checks, even though the Court held the record open, and gave him time to produce the checks after the trial.

This was a "small tax case" that has no value as precedent. But it certainly implies that the Court would have accepted cancelled checks if they were made out to a recognized charitable organization.

This is a very recent case. Here's a link to the decision:

http://www.ustaxcourt.gov/InOpHistoric/Perryclay.SUM.WPD.pdf

I know what the regulation says: You have to have the receipt when you file your tax return. But I'm not sure that the literal interpretation of this rule has really been tested in court. I'm also not sure that the IRS is really denying deductions in an audit if the taxpayer can produce alternate forms of documentation.

We certainly have a duty to educate our clients on what the regs are, what the IRS officially expects, and what may happen if they can't substantiate a donation properly.

But it still seems to me that there's probably some sort of safety net for cases where records are lost or destroyed after the tax return has been filed, but before an audit.

Here's my point:

If the donation was really legitimate, particularly if it's a lot of money all at once, then the organization should not only issue a receipt at, or very shortly after, the time of the donation, but it should also be able to issue a duplicate receipt a couple years later. A duplicate receipt will not only show the date of the donation, but it should also show the date the original receipt was issued. In principle, it could be just a photocopy of the original receipt, which should be acceptable to the IRS. The client should have enough time between getting an audit notice and the audit itself to obtain such a duplicate. On this fact pattern, the IRS would never know, and wouldn't care, when the taxpayer obtained the receipt.

I'll take it a step further. If I was the treasurer or controller of a nonprofit, or, for that matter, if I was advising the treasurer or controller of a nonprofit, in my capacity as a tax pro, I would probably be willing to backdate an original receipt to reflect the date of the donation.

In other words, if the organization has a record of the donation, but does not have a photocopy or PDF image of the receipt that was issued when they received the donation, I don't think it's an act of fraud to write a receipt that shows the date of the donation, without indicating the date on which the receipt was issued. By doing so, the organization is manually creating a duplicate of the original receipt.

All of this is based on the assumption that the donation was really made during the year in question, that the organization has a record of it, and that both the taxpayer and the organization are behaving ethically and acting in good faith.

It shouldn't be that difficult to substantiate donations after the fact. The real point is that the taxpayer, and the tax pro, have to act quickly after receiving an audit notice.

Someone may want to argue about what it means to "manually create a duplicate" of an "original receipt," and whether it is appropriate to do so, as I suggested, without indicating the date the duplicate was created.

And that's an argument I'm ready to have. I use the term argument in a healthy, professional sense.

The definition, and the very concept, of an original document has changed dramatically in the last ten years or so. Banks stopped providing cancelled checks a long time ago. But it's much more profound than that. Many people don't even get a paper bank statement anymore. The statements are online. We issue invoices or receipts in PDF format, using QuickBooks or some other program, and e-mail the receipt to the customer.

An electronic document is often the original. This is certainly the case when it comes to tax returns that are e-filed.

So if the church that received the donation has a PDF image of the receipt they provided back when they got the donation, they can just e-mail it to the guy again, or they can print another copy.

But if the church is a tiny operation with only 30 members, and no computer, and they still use handwritten ledgers and handwritten receipts, the bookkeeper can write another receipt with the date of the donation. I don't see how that's any different than printing from the PDF.

The definition of copy is just as unstable as the definition of original. If I write a note to someone by hand, I can make a copy of it by writing it out a second time. Copy does not mean photocopy. Some will say that I have created two originals, and you might even be able to tell them apart based on subtle differences, such as where I began writing on the paper. But that doesn't mean it isn't a copy.

The question obviously involves some fairly complex historical and legal issues, and there's room for differing opinions. But the concept of multiple copies of a single document existed long before the printing press or the photocopy machine. Copies were made by hand. They weren't identical, but they were nevertheless considered to be copies.

The idea of an original instrument, in many areas of law and commerce, is slowly dying.

For a last will and testament, you better have an original instrument. And certainly the idea of an original is still relevant, for example, for works of fine art.

But in many other ways, the very concept of an original is becoming obsolete.

BMK

[S T]

Valid Points

Koss,
Thanks once again for your thoughts

As I just acquired a small church for accounting - I am going to advise them based on points in your "outline" items for them to implement - "duplicate" receipts notations, etc
For this client, I am confident after working with the Church Secretary and Pastor they try to adhere to all necessary reporting procedures, so this would be one more that they can readily implement.

Sandy

[Gretel]

OK, here is the case, dollar amount a little less than I remembered:

http://www.ustaxcourt.gov/InOpHistoric/Gomez3.SUM.WPD.pdf

[Koss]

Gomez v. Commissioner of Internal Revenue

Thanks, Gretel. That's a very interesting case.

It is a cautionary tale.

The taxpayers didn't produce a receipt for their donations at the audit. They finally produced a letter at the trial, and the letter was dated the day of the trial.

And they weren't represented by counsel. (Of course, hiring a lawyer would have cost them more than the amount of the deficiency. But they probably did the audit on their own, too. That was the real mistake.)

And the case can't be used as precedent.

If you read the case carefully, the Court also noted that the letter didn't satisfy certain other requirements, dealing with whether the taxpayer received anything in return for the donation.

This couple could have prevailed. The case wouldn't even have gone to trial. The IRS would have conceded the case if they had obtained from their church copies of the receipts that were issued when the donations were made, like I suggested in my post.

It does seem like maybe they produced the cancelled checks at the audit, and that wasn't good enough for the IRS examiner. But they still could have resolved it without going to court, and waiting until the day of the trial to get something from the church.

It could have been resolved at IRS appeals, for heaven's sake.

BMK

[taxea]

I'm with Koss on this one. I have told my clients if they don't have the receipt they can't take the deductions without expecting the IRS to question it.
Same with vehicle mileage.

[MAMalody]

Let's see what the court case says:

"Respondent does not question whether petitioners made the payments to the Apostolic Assembly during 2005. Nor does respondent question the legitimacy of the Apostolic Assembly as a
valid section 170(c)(2) exempt organization. It is clear that petitioners wrote 10 checks for tithes to the Apostolic Assembly. Petitioners made donations for “special offerings”. Petitioners
participated in auxiliary groups and other types of church activities. Further, the Apostolic Assembly gave petitioners a letter dated January 22, 2008, which indicated that the church
received $6,552 from petitioners during 2005.

Despite the fact that petitioners made the contributions, section 170(f)(8)(A) and section 1.170A-13(f)(1), Income Tax Regs., require a contemporaneous written acknowledgment for
contributions of $250 or more in order for a charitable contribution deduction to be allowed. The letter from the Apostolic Assembly was not contemporaneous with the claimed deduction. The letter was dated January 22, 2008, the date of the Court’s trial session in El Paso, Texas, and was not received by the earlier of petitioners’ filing their income tax return or the due date of April 17, 2006.8 See sec. 170(f)(8)(C); sec.1.170A-13(f)(3), Income Tax Regs."

It seems to say that the amount or date of the contributions are not really in question. The questions seems to specifically be did the substantiation meet the code and regs...which it cleary did not. Not because the statement was dated the court date, but it was received after the date the return was filed and the due date of the return.

I don't have a real problem with the church reproducing the statement, althought I believe much caution should be exercised here, if that is what they are doing. I believe Koss is dead wrong about the IRS not knowing when the statement was received. As an auditor it would be normal practice to test any requirement that was necesssary to validate any specific item on a tax return. The date the statement was received would be discovered. In this case there was no allegation that a prior statement was received...at least not in the court records.

While I do agree that this case does not set precedent, it does tell you how the IRS and the courts look at this issue. I would be interested if anybody has a case to the opposite...that is, to say, the court and the IRS indicate that the substantiation requirements are not met with respect to the date the statement was received after the filiing date, they acknowledged that it is okay and they will accept the contributons as a valid deduciton.

[Koss]

Receipt

MAMalody wrote:

I don't have a real problem with the church reproducing the statement, althought I believe much caution should be exercised here, if that is what they are doing. I believe Koss is dead wrong about the IRS not knowing when the statement was received. As an auditor it would be normal practice to test any requirement that was necesssary to validate any specific item on a tax return. The date the statement was received would be discovered. In this case there was no allegation that a prior statement was received...at least not in the court records.

You are correct that in the Gomez case, the taxpayers may not have received a receipt when they made the donation. I agree that the IRS expects you to get a receipt when you make a donation, and they also expect you to keep it for three years.

I am certainly not encouraging anyone to ignore the requirements.

My point is more subtle. If your client gets an audit letter in the mail, and it identifies charitable contributions as one of the items, and they don't have the receipt, they have time to obtain a duplicate from the organization before they even go to the audit. If the organization provides a duplicate of the receipt that was issued when the donation was made, then I don't think the IRS, at the audit, is going to raise the issue of when the receipt was issued. The date on the duplicate receipt should be the date of the donation, or maybe a week or two later, if it was done by mail.

It does get a little gray if the taxpayer did never had the "original" receipt. That would suggest that the taxpayer did not comply with the requirements.

But if the organization provides a duplicate, that implies that there was an original at one time.

BMK

[New York Enrolled Agent]

I agree that the IRS expects you to get a receipt when you make a donation

It does get a little gray if the taxpayer did never had the "original" receipt. That would suggest that the taxpayer did not comply with the requirements.

First, the law (i.e. the Internal Revenue Code) contains the substantiation requirements. The IRS administers what Congress has enacted into the Code. There is no expectation of a receipt - it is required. Personally, I don't see an Appeals officer rolling over on this. I'm sure Mr. & Mrs. Gomez discovered that.

Second, there is no "gray" area if the taxpayer did not have the required acknowledgement. Plain and simple, no deduction. Personally, I review the acknowledgements and if they don't comply with the law I hold the taxpayer's return until the document satisfies the code. The key to the law is the requirement that the document be "contemporaneous". I see black & white here. There is no "wiggle" room.

IRC §170(f)(8) Substantiation requirement for certain contributions
(A) General rule
No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).

(B) Content of acknowledgement

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 donee organization 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 outside the donative context.

(C) Contemporaneous
For purposes of subparagraph (A), 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.

[Koss]

Further Thoughts

When you are actually preparing a tax return, there are certain questions that should be asked, and even some questions that must be asked. For example, for EIC due diligence, you have to ask whether the child lived with the taxpayer.

But after the return is filed, things are a little different.

If you are helping a client prepare for an audit in connection with charitable contributions, I'm not sure you have to ask the client, "Did you get a receipt when you made the donation?"

You may need to educate the client that the IRS auditor may ask this question.

But it might be better for the client if you don't know the answer.

In preparing for the audit, you could begin by asking, "Do you have the receipt for this donation of $750?" If they say yes, you examine the receipt, and if it appears to meet the substantiation requirements, based on the date on the receipt, then I think you're done.

If they say they don't have the receipt, then your next question is: "Can you get a duplicate from the organization?"

And you should explain that what they need is a duplicate of the receipt that was issued when they made the donation--not a letter, and not a new receipt.

If your client responds by saying, "Well, gee, I never got a receipt..."

Now you have to let your ethics and your intuition guide you.

You could respond by saying, "Then you haven't met the substantiation requirements. You can't take the deduction. I'll explain to the IRS that we are conceding this issue at the audit."

Or you could respond by saying, "No, no, wait a minute. You don't understand... The organization has to issue a receipt for charitable contributions. If you didn't get a receipt, you can't take a deduction. They must have given you a receipt. Just call them and ask for a copy. It's like asking for a copy of your phone bill or your credit card statement."

What would you do?

BMK

[Koss]

Code Requirements

New York Enrolled Agent--

I agree that the Code is black and white, and that the requirements are not a gray area.

I'm not sure I would "hold the return," because I'm not convinced that the preparer is required to view the documentation. Based on all the facts and circumstances, your relationship with the client, and the amount of the donation, I think it may be acceptable to prepare the return based on the client's representation that they have the proper documentation.

Where I think there is a bit of room for discussion is how you handle this issue after the fact, when you are facing an audit.

See my post below, titled, "Further Thoughts."

Representing a taxpayer at an audit on this issue is a very different exercise than preparing the original return.

BMK

[Gary2]

Since I'm quoted at the beginning of this thread, let me mention my self-correction in the other thread. Though I originally thought a check of $250 or more, without receipt, was valid substantiation for a $249 deduction, it's clear from the code and cases that it's not.

But as for getting the receipt at the time:

(C) Contemporaneous
... 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.

In other words, it doesn't have to be at the time of the donation, or even within a few weeks (ignoring special cases such as donations of an auto). Furthermore, it can only be added to an amended return if the substantiation was actually in hand at the time of the original return. Likewise, a late filed return raises the same issue.

My synagogue routinely sends out acknowledgement letters in January, covering the previous year. It shows date of each contribution, purpose, gross amount, value of anything received (typically just for special events that have meals), and net amount, with totals of each monetary column. I just enter the grand total of net amounts for my personal return. This seems to meet the substantiation requirement.

A question being danced around is what happens if the taxpayer loses the acknowledgement. My guess is that a court might decide on the basis of credible evidence and testimony, so if the charity confirmed that they issued a timely acknowledgment and the taxpayer testified credibly that it was received and that there is a good reason it was lost, then the court might still conclude that the taxpayer has proved compliance with the substantiation requirement.

[MAMalody]

(C) Contemporaneous
For purposes of subparagraph (A), 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.

It is interesting to note the wording "...if the taxpayer OBTAINS the acknowledgment..." It looks like we are not really even talking about the date on the statment.

A further point of interest would seem to indicated that if the taxpayer filed the return on, say, 15 March, obtained the receipt on 1 April, that the deduction would be disallowed. Interesting.

[FEDUKE404]

My 2¢ worth

If you bother to read the case, to include page 6, the ruling is not so much that you cannot provide "late" receipts, although such a need for contemporaneous records was mentioned at least twice.

The real problem was that the verbiage on the receipt provided did not meet the necessary statutory substantiation requirements to be valid, regardless of when it was issued.

In so many words: It was a "bad" ( = worthless, not late) receipt.

FE

[taxea]

Wouldn't the easiest thing to do be to ask the TP to get a copy of the receipt? Surely for that amount the charity would have records. I don't think the preparer is responsible for doing the leg work when the client wants the deduction. It's takes enough of our time to verify that the charity is still in good standing with the IRS.