I don’t know about you, but I certainly can’t. But that’s exactly what happened to a couple in U.S. Tax Court.
Now, a common question clients frequently ask tax pros is “how much can I deduct?” The answer is always: what is legitimate, ordinary and necessary, and DOCUMENTED. If it isn’t legitimate and ordinary and necessary, you don’t have a deduction. If you don’t have documentation, you don’t have a deduction. And if you don’t have CONTEMPORANEOUS documentation, you may lose out on a deduction!
Losing out on any legitimate deduction is painful. It was especially painful for a married couple in the summer of 2012 summer when the U.S. Tax Court sided with the IRS in denying a $25,000 charitable deduction (David P. Durden and Veronda L. Durden v. Commissioner of Internal Revenue, https://casetext.com/case/durden-v-commr-of-internal-revenue). They had made donations to their church in various amounts during 2007. The IRS disallowed the deductions, and the couple produced records showing the donations including a January 2008 letter from the church acknowledging the donations.
However, under U.S. tax law, in order to deduct the donated amounts, taxpayers must have not just an acknowledgement of the donation, but the letter or acknowledgement MUST specify that the church or organization did not provide goods or services in return for the donations. The letter from the church did not have that statement, resulting again in a disallowed deduction.
The couple then obtained a letter from the church in June 2009 that included the required statement. However, the IRS continued to disallow the deduction because a very specific tax law requires that taxpayers receive properly stated acknowledgements by the date they file their returns for the year the deduction is claimed or by the due date, including extensions, for the return, whichever is earlier. Because the letter was obtained in June 2009, well after the return had been filed, the deduction was denied.
The Tax Court, in siding with the IRS, acknowledged that they didn’t disagree that the taxpayers had made the donation, but that there was no substantial compliance with the tax law regarding having contemporaneous documentation of the donation.
As we plan and move forward with your charitable giving every year, take a few extra minutes to review the rules to keep your donation eligible to deduct, check your documentation and records, and make sure you have everything to back up your tax return in case of an audit or inquiry. If you have any question about what documentation to have or how long to keep records, contact us or check our guideline at https://bourbonnaistax.com/resources/record-retention-guide/.