Bottom Line: Non-Profit organizations (i.e. Churches and Charities) must ensure that they protect their donors by including the “magic blurb” stating that no goods or services were provided in exchange for the donor’s contributions no later than January 31 of the year following the donation.
What does It Mean: In a recent tax court case a Texas couple, the Durden’s, were denied a deduction for a $25,171 cash contribution to their church. As customary the church sent the couple a letter acknowledging the charitable gift in January however the Church failed to include the “magic blurb.” When the Durden’s were audited, they produced this statement to the IRS and were denied the deduction. Later, the church produced a second statement that included the proper wording however the tax court ruled that the statement was not received by the due date for filing the Durden’s original return for the year. In the end, the tax court sided with the IRS due to the fact that the Durden’s did not have the proper receipts to take the deduction.
This is a sign as to the extent that the IRS is prepared to go in order to make taxpayers have the documentation to support taking the charitable contribution deduction. Here are some steps, from the IRS Guide, that will keep the church/charity and donor safe in regards to substantiating the charitable contribution deduction:
- A donor must have a bank record or written communication from a charity for any monetary contribution before the donor can claim a charitable contribution on his/her federal income tax return.
- A donor is responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable
- A charitable organization is required to provide a written disclosure to a donor who received goods or services in exchange for a single payment in excess of $75 no later January 31 of the year following the donation.
Sample acknowledgment of a financial donation to a 501(c)(3) nonprofit:
Thank you for your contribution of $ (amount) to (organization’s name) on (date) . Your support will (add briefly what this donation will do). (Organization’s Name) is a 501(c)(3) nonprofit organization. Your contribution is tax-deductible to the extent allowed by law. No goods or services were provided in exchange for your generous financial donation.
Sample Letter to Donees (in Microsoft Word Format)
For you that must know the specific section of the tax code referenced in this case, please check out this quote and link to a great technical article on the subject.
“Individuals claiming charitable contribution deductions should be mindful of the substantiation requirements of Sec. 170(f)(8) to avoid having a deduction denied over negligible omissions. In addition, charitable organizations relying on the goodwill and financial contributions of donors should pay particular attention to the requirements of Sec. 170(f)(8)(B), ensuring that documentation is provided in a timely manner and meets every requirement, no matter how trivial, to substantiate deductions for their donors.” – Carrie Sowders, CPA, AKT LLP, Lake Oswego, Ore.
Tax Court Memo 2012-140: Durden vs. Commissioner of Internal Revenue