The Importance of Documenting IRS Tax Deductions for Charitable Contributions
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.