Thank-you letters sent to donors may not provide them with all of the documentation they need to claim a charitable deduction for their contributions.
A recent IRS tax court case serves as a good reminder for all 501(c)(3) organizations to review the procedures used to thank donors. In this tax court case, the donors were denied a charitable deduction on their individual income tax return because the acknowledgement they received from their church did not provide all the required documentation. IRS rules do not allow donors to take a charitable deduction for a donation of $250 or more unless contemporaneous written acknowledgement is obtained from the recipient organization. To qualify as contemporaneous, the IRS requires donors have the receipt or thank-you letter by the time their tax return is filed. In addition, the acknowledgement must say whether the donors received anything in return for the donation.
In the case "Durden v. Commissioner" (T.C. Memo. 2012-140), a couple in Texas claimed a charitable contribution deduction of $25,171 on their 2007 tax return, mostly for checks written to their church. In January 2008, they received a letter from their church, acknowledging their contribution. The IRS denied the Durdens’ charitable deduction because the receipt lacked the required statement regarding whether any goods or services were provided in consideration for the contribution. In an effort to correct the problem, the church issued a second receipt in June 2009 with the same information found in the first acknowledgement, as well as a statement that no goods or services were provided in exchange for their contribution. The IRS denied the Durdens’ deduction a second time because the written acknowledgement, even though it contained all of the correct information, was not contemporaneous.
The Durdens took their case to tax court, arguing their second receipt contained all required documentation to support their charitable deduction. But the tax court focused only on the first receipt. The court determined the second receipt could not be considered because it did not comply with the contemporaneous requirement of section 170(f)(8)(C). Code section 170(f)(8)(C) defines a contemporaneous receipt as one obtained on or before the time the taxpayer files their return. The charitable deduction was disallowed by the tax court because the first acknowledgement failed to include required documentation and the second acknowledgement, which contained the documentation, was not contemporaneous.
An interesting point in this case is that the amount of the Durdens’ contribution, and the fact that they actually made a contribution, was never in dispute. The charitable deduction was denied solely because the receipt they had at the time their return was filed lacked the disclosure that no goods or services were provided in exchange for their contribution.
The tax rules put the burden of obtaining the proper contemporaneous receipts with the donors, not the charity. This means that the not-for-profit organization does not incur a penalty if it does not acknowledge a contribution. However, the consequences for the donors can be significant when they cannot claim a tax deduction. It is a good idea for all charitable organizations to become familiar with the substantiation requirements to ensure their donors sustain their charitable contribution deductions.
According to the IRS, here are some of the key items a proper receipt must include:
- Name of the organization
- Amount of cash contribution
- Description (but not the value) of noncash contribution
- Statement that no goods or services were provided by the organization in return for the contribution, if that was the case
- Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
A separate acknowledgement may be provided for each single contribution of $250 or more or one acknowledgement, like an annual summary, may be used.
IRS Publications 526 and 1771 provide some helpful examples and more detailed information to help you substantiate the contributions you receive.
For more information or any questions you might have on this topic, please contact your Baker Tilly advisor.