The IRS continues to struggle with donors substantiating charitable contributions in the midst of advanced computer skills and capabilities or simply failures of donors to know, understand and adhere to the substantiation rules. Contributions of $250 or more are required to be substantiated with a contemporaneous written acknowledgment that includes:
- The amount of the cash donated or a description of the property donated (no value is required);
- whether the donee provided any goods or services in consideration for the contribution, and if it did, a description and good faith estimate of the value of the goods or services provided; and
- if the goods or services consisted entirely of religious benefits, a statement to that effect.
Charities have struggled to implement the substantiation rules and include all the pertinent information. Donors have struggled in understanding what is required substantiation and when they have to have substantiation, i.e., prior to the filing of a timely filed return. The IRS has struggled with the ability of taxpayers to provide fraudulent receipts due to the wonders of electronic capabilities. In an effort to provide for an avenue to resolve all of the failures, errors and frustrations, the IRS issued proposed regulations in September 2015 providing for the creation of a new IRS filing. The filing would allow charities to report donors and related donations to the IRS in a manner similar to the current Form 1098-C used for reporting the donation of transportation equipment. The filing would require the charity to report the donor's name, address and social security number as well as the amount of the donations. The proposed filing was strictly optional, not mandatory.
The IRS requested comments on the proposed regulations and received an overwhelming response. Despite proposing an optional filing, many charities believed that the regulations were suggesting a mandatory filing requirement with the IRS. Charities often strive to protect the identities of their donors and were concerned the proposed filing would unnecessarily provide their entire donor list to the IRS. Additionally, there were concerns that charities choosing to utilize the filing option would not be able to provide adequate security over the social security numbers of the donors giving rise to concerns of potential identity theft.
Amidst the hue and outcry against the proposed regulations, the IRS attempted to placate the charity world by emphasizing the "optional" in the new regulations in a rare email communication issued early in December 20125. However, concern over the proposed filing continued and in an action published January 8, 2016, the IRS has withdrawn the proposed regulations that would institute the new filing mechanism.
In the midst of all the discussion created by the IRS proposal, it is a great time to review the substantiation requirements and double check contribution receipts before they are issued this month. Charities continue to struggle with the substantiation requirements resulting in donors forfeiting the right to deduct charitable contributions. While the real burden to obtain adequate substantiation for one's charitable contributions lies with the donors, donors rely on charities to issue receipts that comply with the rules.
To assist donors, in the event of an IRS examination, contribution receipts reporting donations of $250 or more should include the following:
- The name and address of the charity (including a logo or other unique identifier is not required but beneficial);
- The date the receipt is issued (this is not required but is a prudent practice to assist donors in proving the receipt was timely provided to them);
- The name and address of the donor;
- A listing of the dates and the donation amounts (receipts for noncash donations would only list the date and a description of the item(s) donated);
- In the event the donor is provided a product or service in exchange for the donation, the value of the product or service should be indicated; and
- Statement that there were no goods or service given in exchange for the contributions other than intangible religious benefits (if the charity is a religious organization). (If goods or services have been given in exchange, this statement may be modified to indicate that the value has already been noted in the receipt.)
Donors should also be aware there is no mandatory deadline for when a charity has to issue contribution receipts. Many charities and donors mistakenly believe contribution receipts have to be issued by January 31st each year. While this may be a prudent business practice, it is not a legal requirement. The donor is legally required to have the receipt in his/her possession either by April 15th or, if later, the filing date of his/her timely filed tax return.
In summary, charities do not have to worry about a new filing requirement with the IRS, but they do have to worry about keeping their donors happy. Reviewing contribution receipts for the above factors will make sure charities assists their donors in meeting all of their legal requirements in claiming charitable contributions.