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How to Protect Charitable Donations From IRS Nitpicking

In a recent Tax Court case a couple was denied a $25,171 charitable deduction, mostly for contributions to their church, an organization eligible to receive tax-deductible contributions.

In audit, the couple produced cancelled checks for all of their donations. With a very few exceptions the checks were all for amounts greater than $250. They also produced a letter of acknowledgment from the church, which was dated prior to the date the couple filed the return in question.

The IRS did not accept this letter of acknowledgment from the church because it didn't include the required statement on whether any goods or services were provided in consideration for the contributions. The couple got a second letter from the church after the initial audit that contained the missing statement, but this was also not accepted because the revised letter of acknowledgment, dated over a year after the filing of the tax return, was not "contemporaneous."

The Tax Court upheld the decision of the IRS to disallow the deduction, concluding that the couple had failed, strictly or substantially, to comply with the clear substantiation requirements of the Tax Code.

The fair value of used goods

You can also claim a deduction for the "fair market value" of used items donated to a church or charity. According to the IRS, fair market value is the price a "willing, knowledgeable buyer would pay a willing, knowledgeable seller when neither has to buy or sell." IRS Publication 561, "Determining the Value of Donated Property" provides guidance in determining fair market value for all types of property.

You are responsible for determining the fair market value of the items you are donating. The charity to which you make the donation is not required to, and in most cases will not, provide you with a value. Click here and here for online valuation guides.

You cannot deduct the contribution of a used item of clothing or household item unless it is in at least "good" condition (except for a single such item with a documented appraised value of more than $500). Donations of clothing and household items with a "minimal monetary value", such as used socks or underwear, are also not deductible.

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