Can Charitable Gifts Cost You?
The IRS and Congress believe many do-gooders are doing more good for themselves than for the needy.
Audits and other enforcement, fueled by get-tough legislation, are focusing unfriendly attention on charitable donors. Tax-avoiding ploys of the wealthy-which can involve esoteric trusts, foundation-like pools of assets, and large gifts of art-are under attack as sometimes serving the taxpayer first and a charity incidentally. Particularly cheeky abuses targeted by recent legislation include fanciful valuations of gifts of stuffed big-game animals to museums-a backhanded way to recover the cost of a hunt-and schemes that greedily milk incentives for historic preservation.
But also under fire are everyman types of donations such as secondhand clothes, used cars, and the dropping of a few bucks into a church collection plate or Salvation Army kettle.
Despite jawboning by the IRS, auditing run-of-the-mill donations is not a high priority at the thinly stretched agency. And despite rules about records to back up donations, a tax return in many cases requires little if any detail other than an overall total deduction.
Nevertheless, new rules to encourage righteous accounting for gifts can create drudgery and special forms to fill out for law-abiding taxpayers-at least those who itemize deductions and thus can deduct charitable gifts.
The real target of newly articulated rules on valuing and documenting gifts may be accountants and other paid tax preparers who now complete most personal tax returns. The IRS has made it clear it wants to boost across-the-board compliance with the tax code by imposing a higher standard of acceptable practices for paid preparers. "Creating a precise legal standard is worthwhile and appropriate," says Washington, D.C., attorney Marcus Owens, former head of the IRS division dealing with charities.
Conrad Teitell, a Stamford, Conn., attorney who advises charities and donors, supports the effort, warning that unless abuses are tackled the entire charitable sector could come under a cloud. "I don't believe the clampdowns have gone too far," he says.
One rule that may make substantiation more tricky took effect with gifts of used clothing and household items after August 17. No deduction will generally be valid unless the item is in good condition or better.
Starting next year, taxpayers must be ready, if asked, to substantiate cash gifts of any amount with a canceled check, receipt from the donee, or bank record. That means no more unrecorded informal cash gifts.
Already biting is a limitation that took effect in 2005 on donations of autos. To combat flagrant overvaluing, a deduction is now generally limited to the amount a charity receives when it sells the donated car.
Older rules remain in place-and sometimes they seem unfair.
Even if your employer or clients pay big bucks for your expertise, the IRS says you can't claim a deduction for the value of your time helping a charity. People who use their cars in charity work can deduct the cost of directly related gas or simply deduct 14 cents a mile-less than a third of the 44.5 cents allowed for driving on business during 2006.
You can't deduct the full amount of a donation if you get more than a minimal benefit-for example, a concert ticket or dinner as part of a fundraiser.
Cash gifts of $250 or more require a receipt from the charity-not just a canceled check-and noncash gifts worth over $5,000 may require an appraisal.
And the IRS is adamant that a raffle ticket is not deductible even if the ticket says you are making a donation.