A recent Tax Court case serves as a reminder that the IRS and the courts require strict compliance with the documentation rules for charitable donations. The taxpayer in this case had spent substantial sums as a volunteer in support of a charitable organization. Because she did not obtain proper acknowledgement from the charitable organization, however, many of her deductions were lost.
No charitable deduction is allowed for the value of services a taxpayer renders to charity. However, a taxpayer is allowed a charitable deduction for any unreimbursed out-of-pocket expenses necessarily incurred in performing donated services (other than lobbying) for a charity.
General documentation rules. For direct contributions to a charity, the documentation rules hinge on whether the contribution is under $250. For smaller contributions, the taxpayer must have either a cancelled check, credit card record, or receipt from the charity. Cash contributions, unsupported by a receipt, are disallowed.
If the contribution is $250 or more, a cancelled check or other bank record is insufficient. The taxpayer must always have a receipt, and that communication from the charity must identify the amount of the contribution, and also indicate whether any goods or services were provided to the donor in exchange for the contribution.
Expenses of volunteers. The general documentation rules above address direct donations to a charity; they do not cover the situation of a volunteer incurring out-of-pocket expenses such as travel costs, the purchase of supplies, or other outlays on behalf of a charity. The recent court case concluded that a volunteer’s expenses for a charity must be documented in two ways:
- The volunteer must maintain a cancelled check, credit card record or receipt that identifies each expenditure on behalf of the charity.
- The volunteer must obtain an acknowledgement from the charity that describes the services that were provided.
This acknowledgement from the charity must be obtained no later than the due date (including extensions) of the tax return for the year the contribution was made. If the return is filed before the due date, the donor must possess the acknowledgement when the” return is filed. If the acknowledgement is not properly completed and timely obtained, the charitable contribution can be disallowed in its entirety.
Please contact us if you have any questions regarding these rules. Under these requirements, even the most legitimate charitable contribution can be disallowed by the IRS if the taxpayer has not obtained the proper documentation.