When your tax preparer tells you that you must meet the “letter of the law” in a transaction, you should heed their warning.
Congress has been challenging the IRS to close the “tax gap.” The tax gap is the difference between the amount of estimated money and what the IRS actually collects. The tax gap is the result of non-filers, under filers (those not reporting all of their income), and those people that file a correct return, but do not pay the full amount. In a recent court case, it appears the IRS has taken the stance that you dare not make a “foot fault” in taking a tax deduction.
In the case of Durden v. Commissioner (T.C. Memo 2012-140 (May 17, 2012) the Tax Court ruled against a couple that failed to follow all of the rules even though they were claiming a legal deduction. As you read the summary of this case, consider if you could be in a similar position with deductions you claim. This type of ruling can affect any type of transaction when you do not dot every “I” and cross every “t.”
Mr. and Mrs. Durden filed their 2007 income tax return and claimed a charitable contribution of $25,171. Most of the cash and checks were for the donations they had given to Nevertheless Community Church (NCC). Except for five checks, all of the checks were for more than $250. NCC is an IRC §501(c)(3) organization and is eligible to receive tax-deductible contributions. The Durdens received a letter from the IRS questioning the large charitable deduction. The Durdens promptly sent the IRS copies of the checks they had written. They also sent a letter from the church that acknowledged the generous donations totaling $22,517.
The IRS did not accept the first acknowledgement from the Durdens. It disallowed the contribution because the acknowledgement did not specify that the Durdens did not receive any goods or services for their contributions. The Durdens asked the church for a second letter stating that no goods or services were received. Because no goods or services were furnished in exchange for the donation, NCC provided the letter. The IRS again denied the deduction because the second letter was furnished after the tax return was filed.
To understand the situation, you need to look at the law. IRC §170(a)(1) allows a deduction for contributions to charitable organizations if they follow the regulations prescribed by the IRS. IRC §170(f)(8) provides that no deduction is allowed for a contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization. The acknowledgement must show the amount of cash and a description (but not the value) of any property other than cash contributed. It must also show whether the donee organization provided any goods or services in consideration for the donation.