NEW YORK (MainStreet) — Although it may be tempting to fudge on that blank form you're given when you make a charitable donation, your $3 sweater just isn't worth $50 — and the IRS knows it. If you're claiming charitable deductions on your taxes this year, here's a look at how to do it by the book.
Pricing/valuation guides are readily available.
Just because you paid $1,000 for a suit doesn't mean it's worth that when you donate it, says Ken Kamen, president at Mercadien Asset Management.
If you've never been to a thrift shop or don't know what a fair market value for an item may be, Salvation Army and Goodwill have charts showing average retail prices. At Salvation Army, pants and blouses range in value from $2 to $8, and at Goodwill, books are priced from $1 to $3. Even if you're donating to a different charity, these price charts offer a good general guide, Kamen says.
It comes down to fair market value — what someone would willingly pay for the item, says Kay Bell, contributing tax editor for BankRate.com.
"You may think something is worth $50, but stop by a thrift store and just see what similar items are being sold for. You'll be stunned how inexpensive nice things are. Unless you have a Chanel outfit that was worn to a presidential inauguration, it's not going to appreciate in value."
If you have a rare or historically significant piece of clothing, it should be separately appraised.
"If you want to donate the fedora that Humphrey Bogart wore in Casablanca, it's going to be worth more than the Salvation Army's recommended price for a hat," Kamen says. "Back story always means a lot on vintage collectibles, and if you have something like that you should definitely get it appraised."
As a general rule, people try to do right by charities, Bell says. Most of the time when people over-claim their charitable deductions, it's simply due to a lack of information.
"They aren't so much trying to cheat, they just don't realize the going rate. But you can bet the IRS does," she says.
It's your word against theirs, but that's not a game you want to play.
"It's the beauty and the curse of the voluntary tax system," Bell says. "The burden of proof is always on you."
If you decide to play "audit roulette" and overstate your charitable deductions on your tax forms, you'll have to prove to an auditor exactly what you donated and how much it was worth, regardless of what the receipt from the charity says, Kamen says.
"Yes, they may give you a blank form, and yes, you can technically fill out anything you want, but depending on the audit you get, you're going to need proof of what you donated."
This "proof" could be a photo of the items, or you could take things a step further and have the photo notarized on the day of your donation, then affix the receipt from the salvation army, Kamen suggests. Yet even with this documentation, there's no guarantee an auditor will agree with your valuations.
"Sometimes people get picked for audits that are the equivalent of a proctologist's exam," Kamen says. "For the most part, though, when the regulator comes in they are looking for a culture of compliance. They're going to say, 'Are these the steps that a reasonable man would have taken to comply?'"
The IRS is very attuned to things that look suspicious, Bell says. For example, if you claim to have donated large amounts of clothing and household goods but you didn't move or sell a home, there will be questions.
"It may be totally legit. Maybe you decided to give away all your worldly possessions, but the IRS has the right to say, 'We don't think that's accurate, we are going to disallow that.'"
Depending on how much you're donating, additional documentation is required.
No matter what you're donating or how much it's worth, you need a receipt. If you're donating items worth more than $250, you need a detailed receipt that describes each item. If you're donating something worth more than $500, you'll need to fill out an 8283 form, and if you're claiming high-end items such as jewelry or art, an independent appraisal is required.
"Really they start wanting more documentation with your filing as soon as you get over that $250 mark," Bell says.
Also, while there's nothing to stop you from claiming multiple donations valued at $249, it's going to look really suspect, Bell says.
"It all comes down to this: How willing are you to go up against an IRS examiner? If you give something to charity every year, and you're fudging a tiny bit, chances are the IRS isn't going to mess with you. But if you just decide you need some deductions one year and you claim $2,000 your first time, it's going to look suspicious."
Keep in mind that the amount you donate relative to your income is also important when it comes to raising red flags, Kame says.
"If you made $50,000 last year, it's not going to seem reasonable that you gave away $10,000 worth of small items. But if you're filing a $500,000 return, then $10,000 seems more reasonable," he says.
— By Kathryn Tuggle for MainStreet