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New Rules Proposed for Substantiating Charitable Contributions

Not-for-Profit|SD Medallion Services|Tax

By Debra Ries

UPDATE to proposed treasury regulations.

Currently, to claim a tax deduction for a charitable contribution, a taxpayer must obtain a contemporaneous written acknowledgement (referred to as “CWA”) from the Donee charitable organization.  On September 17, 2015, proposed treasury regulations were released that provide for an exception to the CWA requirement for deducting charitable contributions of $250 or more.

Background

Section 170(f)(8)(A) of the Internal Revenue Code provides that a taxpayer who claims a deduction for a charitable contribution of $250 or more must obtain a CWA from the Donee organization.   A written acknowledgement qualifies as contemporaneous if the taxpayer obtains such on or before the earlier of (1) the date the taxpayer files an original tax return for the year of the contribution, or (2) the due date, including extensions, for filing the original return.

In addition, to qualify for a tax deduction, the CWA must contain the following information: (1) the amount of cash and/or a description of the donated property, (2) state whether any goods or services were provided by the Donee organization in connection with the contribution, and (3) a description and good faith estimate of the value of any goods or services provided by the Donee organization in consideration for the contribution.   If such goods and services consisted solely of intangible religious beliefs, the acknowledgement must affirmatively state such.  

Section 170(f)(8)(D) of the Code provides an exception to the CWA requirement for contributions of $250 or more if the Donee organization files an information return in accordance with regulations prescribed by the IRS.  This section of the Code that provides for an exception to the CWA requirement has been in existence for many years.  In 1997, when the original treasury regulations were issued, the Treasury Department and IRS specifically declined to issue regulations to effectuate Donee reporting on the basis that requirements whereby the donor was required to obtain a CWA were effective.

In recent years, however, taxpayers under IRS audit for claimed charitable deductions have argued that a failure to comply with the CWA requirement could be cured if the Donee organization filed an amended Form 990, Return of Organization Exempt from Income Tax, to include the information at issue.   In response, the IRS consistently maintained that the exception provided for by Section 170(f)(8)(D) is not available until the Treasury Department and IRS issue final regulations prescribing the method for Donee reporting.  In addition, the IRS determined that the Form 990 is not suitable for Donee reporting regarding this matter. 

Proposed Regulations

The newly released proposed regulations under Section 170(f)(8)(D) provide that a charity can opt to file an information return with the IRS containing the information required for a CWA.   This would alleviate the requirement that a donor obtain a CWA from the Donee.  Under the proposed regulations, the information return would also be required to include the donor’s name, address and taxpayer identification number.    The due date of the return would be February 28 of the year following the donation.

The intent is for the IRS to store, maintain and readily retrieve the information return for a specific taxpayer if substantiation is required in an IRS audit.  The preamble to the proposed regulations suggest that the IRS intends to develop a specific information return for this purpose.

The proposed regulations would also require the Donee organization to provide a copy of the information return to the donor.  If a charity does not file an information return, the donor would be required to obtain a CWA from the Donee.  Under the proposed regulations, charities not are required to file the informational form; but rather, such reporting would be optional. 

Proposed treasury regulations are not binding.   Instead, proposed regulations provide an opportunity for the public to have input into proposed tax rules.  The comment period for these proposed regulations closes December 16, 2015.  Information as to where comments may be sent are contained in the proposed regulations.

Tax Tip for Charitable Contributions

As the holiday giving season approaches, a charity’s development office should revisit the requirements defining what must be included in a written acknowledgement in order for the donor to claim a deduction for the contribution on his/her federal income tax return.  The substantiation rules vary depending upon the amount or value of the contribution, and as to whether the contribution is cash or property.  IRS Publication 1771, Charitable Contributions, Substantiation and Disclosure Requirements, provides an easy-to-understand guide addressing these rules for free of charge.

If you have questions regarding the tax implications and rules for charitable contributions, Schneider Downs can assist.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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