The Importance of Documenting IRS Tax Deductions for Charitable Contributions

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The failure to keep vital documents that substantiate the validity of deductions can be extremely costly even when these documents are nothing more than a letter or receipt that you write to yourself from your own non-profit organization.  A taxpayer who was running an animal rescue learned this costly lesson when she had almost $10,000 in deductions to charitable organizations disallowed because she could not produce documents that she did not receive any consideration in exchange for the contribution.

In the U.S. Tax Court case of Villareale v. Commissioner, the taxpayer was the president of a non-profit animal rescue organization and managed all of the non-profit’s financial affairs.  She claimed a charitable giving deduction of $12,386, but most of the deduction was disallowed, which resulted in the IRS claiming a tax deficiency.  While the IRS conceded that the non-profit was a permissible charitable organization and that the taxpayer made the contributions, it rejected the deduction because Villareale could not produce documents that substantiated she had not received any goods or services in exchange for her contribution.

The tax court upheld the IRS decision to disallow the deduction, indicating that a charitable contribution of $250 or more must be supported by a written acknowledgement of the contribution from the charitable contribution at the time it is made.    While the taxpayer was able to provide bank records from both her personal bank account and the animal rescue establishing that the contributions were provided to the non-profit, the tax court ruled that these documents were inadequate because they did not indicate whether any goods or services were received in exchange for the funds.

While that taxpayer presented the intuitive argument that it made no sense to produce such a document because she was the party on either side of the transaction, the tax court held that the IRS could properly demand such a document.  The tax court reasoned that a “specific statement regarding whether goods and service were provided in consideration for the contributions . . . is necessary.”  Therefore, the IRS had a right to deny the deduction because the documentation was not provided.

This mistake is one that many taxpayers could easily make because it seems counter-intuitive to write a memo or receipt to yourself indicating that you did not receive valuable consideration for a donation you make to your own non-profit organization.  However, this type of documentation can be the key to prevailing when you have deductions challenged by the IRS.

If you have questions about whether you have the appropriate documentation to support a deduction, you should contact experienced Louisiana tax attorney Paul A. Grego.  We offer a free initial consultation so that we can answer your questions and provide an initial assessment of your situation.  Call us today at 504-302-4949 or email us.

What Should You Do If You Are Facing an IRS Tax Audit?

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While no person wants to be the target of an Internal Revenue Service (IRS) audit, there are ways to make the experience less painful – notice we did not say painless.  There are essentially three ways that an IRS audit may be conducted: (1) an office audit, (2) field audit or (3) correspondence audit.  An office audit involve appearing at the IRS office to produce receipts and other documents responsive to the inquiries raised by the IRS while a field audit involves the agent actually coming to your place of business or home to conduct the audit.  The least intrusive form of audit is a correspondence audit where the document requests and responses to these requests all occur by mail.  We have provided some key guidelines for reducing the potential risks associated with an IRS audit.

Do Not Encourage a Fishing Expedition: There are usually certain specific questions that an IRS agent will have about your tax return and claimed deductions.  It is important to inquire about these specific issues prior to meeting with the IRS agent.  The documents responsive to these requests should be identified, isolated and organized.  The goal is to ensure that the proof that your claimed deduction is easily accessible so that the audit agent has no reason to engage in a broad search of other documents that may raise issues that did not originally exist.

Do Not Volunteer Extra Information or Documents: While you are legally obligated to provide documents that substantiate the information in your tax return, this does not mean that you should produce more than is requested.  The documents you provide should be precisely what is requested and nothing more.  Non-responsive information will not help you obscure missing information but could open up new areas of inquiry.

Prepare for the Audit: When you receive notification of an audit from the IRS, you should both consult with the accountant or tax preparer who helped you prepare your return as well as an experienced tax attorney.  They can provide insight into the specific issues raised by the IRS and advise you about specific actions to take or avoid.  While you are not required to have a tax attorney present, this may be a cost-effective decision is you believe you may be facing substantial additional tax liability or even criminal liability.  If you need more time to located documents for the audit, you should request an extension rather than show up without the requested documents.

Responding to Questions during an Audit: While the best alternative is to have an experienced tax attorney who can influence the scope of the audit and help you avoid potential tax liability traps, you should be careful how you respond if you are not represented by counsel.  The answers you provide should be concise and brief without volunteering any extra information.  If you have a feeling that the audit is going poorly, you should not hesitate to ask for a break to consult your tax attorney or accountant.

If you are facing an IRS tax audit, you should contact experienced tax attorney Paul Grego.  We offer a free initial consultation so that we can evaluate your situation and explain your options.  Call us today at 504-302-4949 or email us.