Your donors are giving you their hard-earned money. Are you giving them the documentation they need at tax time in order to deduct their contribution on their tax return?
“Yes” you say? Not so fast.
This is an area where you’ll need to comply exactly with the letter of the law.
A donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor “obtains” a contemporaneous acknowledgement of the contribution from the public charity.
These rules also apply to contributions (tithes) made to a Church, which is a type of public charity.
In the eyes of the law, it is not technically the charity’s responsibility to supply the written acknowledgement–it is the responsibility of the donor to “obtain” it from the charity before taking a deduction.
What information is required to be provided in the contemporaneous written acknowledgement?
- The name of the public charity.
- The date the contribution was received.
- The amount of the contribution (if cash).
- A description of the items contributed (if non-cash). The organization should not indicate in the letter the value of non-cash donations received. It is the donor’s responsibility to assign a value to the items for purposes of a tax deduction. (The organization will value the non-cash item received for internal accounting purposes, but would not communicate that information to the donor).
- A statement indicating whether any goods or services were provided in return for the contribution (even if none was provided). If any goods or services were provided in return for a contribution, the organization should provide a good faith estimate of the value of goods or services provided.
What does “contemporaneous” mean?
An acknowledgement is contemporaneous if it is obtained by the donor on or before the due date of the return for the year the contribution was made (including extensions) OR if it is obtained on or before the due date the return is actually filed–whichever is earlier. In plain language, it just means that the donor has to have the acknowledgement letter in hand before filing the tax return on which the deduction is claimed.
What’s the Problem?
Most organizations provide acknowledgement letters to their donors as a matter of good donor relations. Unfortunately, not all letters meet the standard set by the Treasury Regulations. This can result in good faith donations being disallowed by the IRS upon examination. It happens–especially with larger donations. This type of failure to comply and its consequences cannot be relieved by reliance on “reasonable cause” provisions.
In Tax Court Memorandum 2012-140 (link opens as pdf), the case of Durden vs. the IRS is a fine example of the harsh application of the regulations.
In 2007, Durden contributed at various times during the year, cash donations to their church (NCC), totaling $22,517. The IRS disallowed the deduction and sent a bill for additional taxes owed.
Durden sent, as proof of the legitimacy of the claimed deduction, copies of canceled checks and a copy of the contemporaneous acknowledgement letter from NCC dated January 10, 2008.
The IRS did not accept the acknowledgement letter because it lacked a statement regarding whether any goods or services were provided in consideration for the contributions.
NCC the provided Durden with a second acknowledgement letter, dated June 21, 2009, with the same information found in the first letter as well as a statement that no goods or services were provided to them in exchange for their contributions.
The IRS rejected the second acknowledgement letter because it was not “contemporaneous.” In other words, Durden did not have the letter with the proper wording in hand on or before the date the tax return was actually filed.
The court ruled in favor of the IRS, noting that the language of code section 170(f)(8)(A) provides that “No deduction shall be allowed…” unless an acknowledgement letter with all the required elements is in hand. There is no wiggle room in the statute. The first letter obtained by taxpayer Darden lacked the proper language, and the second was not contemporaneous.
Darden argued that even though they did not meet the letter of the law, they “substantially complied.” The court was of the opinion that without the timely statement of whether goods and services were provided, the donor could not properly determine the amount of the deduction allowable and could not file an accurate tax return. Substantial compliance was not enough. Ouch!
The Takeaway for Donors and Charities
If you are a charity, make sure you give your donors a contemporaneous acknowledgement letter that complies with the law and regulations.
For more information, refer to IRS publication 4221-PC, Compliance Guide for Public Charities.
If you are a donor, pay attention to the letters of acknowledgement you receive from charities you’ve donated to. If you’ve made any single donations that are $250 or more, make sure the statement indicating that “no goods or services were received in exchange for the contribution” is included on the letter, or if goods and services were received, that a description of and dollar amount of those goods and services is included on the letter. If not, request a new letter right away.
Any charity that refuses to provide a proper acknowledgement letter is not worthy of your donations.