Stop me if this sounds familiar: you pull up to your local thrift store, pop open the trunk, hand the attendant two or three garbage bags full of donated home goods and clothing, take the blank slip of paper with the organization's name on printed on the bottom, and drive off. Once home with your receipt, you say, hmmm… how much was in those three bags? Maybe six pairs of pants? A couple shirts? A skirt or two? Maybe three pairs of shoes? Next thing you know you’ve filled up your receipt and assigned a guestimated value to your donated items of, say, $300 for those three bags. Then you throw that receipt in your shoebox for tax time and don't give it a second thought until April 15. Unbeknownst to you, however, your receipt no longer qualifies as valid substantiation and you're at risk to lose your entire $300 deduction.
The donated goods charitable contribution is one of the most often claimed deductions on an individual's tax return, but it’s also one of the most abused and disallowed because of the technical nature of the charitable substantiation rules. The Ohde family of West Virginia found that out the hard way when, in July of 2017, their $145,250 charitable deduction was reduced to just $250 and they were forced to pay almost $40,000 worth of deficiencies and related penalties.
In the case of Mark Robert Ohde and Rose M. Ohde v. Commissioner, 114 T.C.M. 41 (July 10, 2017), the Ohdes alleged that in tax year 2011, they donated more than 20,000 items to a Goodwill in Frederick, Maryland. Goodwill provided the Ohdes with a receipt stating that items in one more of several categories were indeed provided, but did not provide a description of the items, a volume, or their condition. The Ohdes also suffered from several other defects in their ability to substantiate the noncash donations, such as failure to provide contemporaneous documentation for items over $250 and the failure to obtain a qualified appraisal for items valued in excess of the statutory limit. Finally, the tax court noted in their opinion that from 2007-2013 the Ohdes claimed to have donated over $500,000 in noncash goods, an amount the tax court struggled to find plausible. Ultimately, the court found the Ohdes were entitled to only a $250 charitable deduction and assessed deficiency and penalties charges accordingly.
While the Ohde case is not revolutionary or groundbreaking, it’s an important reminder that the IRS is keenly aware of the potential for abuse in the noncash charitable donation context. The Service has also been highly successful in recent years in challenging taxpayer donations through the failure to substantiate argument. It’s important for taxpayers to remember that the rules for properly substantiating a charitable deduction fall squarely on the shoulders of the taxpayer, not the charitable organization, and taxpayers need to be aware of their obligations when deciding to make a donation for which they intend to claim a tax deduction.
The IRS has an excellent resource for substantiating charitable deductions in Publication 1771: Chartiable Contributions Substantiation and Disclosure Rquirements. However, we at Schneider Downs also have immense expertise in assisting our clients in navigating this complex and technical area of the Tax Code. If you have any questions regarding the tax implications and substantiation requirements for charitable contributions deductions, please feel free to contact us for help.