IRS requirements for noncash contributions

December is usually the busiest time of year for thrift shops and charities that accept clothing as donations. People are eager to get rid of their old clothes, but more importantly, get the tax deduction that comes with their donation. Valuing your bag of clothes can be challenging. Some charities, like the Salvation Army give a donation guide for noncash contributions. But most people just put down a number that they deem appropriate. Others value their donations at exorbitant levels. If you don’t have the proper paperwork to backup these valuations then you could be in trouble. The IRS is cracking down on overvalued noncash contributions.

The recent US Tax Court case Kunkel v. Commissioner, T.C. Memo 2015-71 is a prime example of what happens when someone makes noncash donations but does not keep adequate records.

In tax year 2011, the Kunkels claimed on their tax return, $37,315 in noncash charitable contributions. These donations consisted of nearly $22,000 in clothing, $8,000 in books and other related items to four different charities. The only substantiation the Kunkels had was doorknob hangers left by two of the charities. The doorknob hangers were undated and did not describe the property contributed.

The IRS disallowed the $37,315 of noncash charitable contributions in its entirety. The US Tax Court upheld the determination made by the IRS. The Kunkels had to repay $12,338 in taxes along with an accuracy related penalty of $2,468.

For those making noncash charitable contributions (e.g. a bag of clothes to the Salvation Army), it is important to know the substantiation requirements that the IRS requires for your donations.

For property valued at less than $250, taxpayers must obtain and keep a receipt from the charitable contribution showing the name of the organization, date and location of the contribution, and a reasonably detailed description of the property.

Property valued from $250 to $499 has additional requirements to those above. If there are two or more contributions worth more than $250, a written acknowledgement is required for each one. The acknowledgement must be in writing, contain a description of the property donated, and state whether the qualified organization gave any goods or services for the contribution. The acknowledgement must also include a description and good-faith estimate of the value of any goods and services given. The taxpayer must receive this acknowledgement before the earlier of (1) the date the taxpayer files the return or (2) the due date, including extensions, for filing the return.

The taxpayer must keep written records for each item of property donated. The record must include the following info:

1)      Name and address of the donee organization.

2)      The date and location of the contribution

3)      A reasonable detailed description of the property donated

4)      The FMV of the property donated at the time of the contribution and the method this FMV was calculated.

5)      The cost or other basis of the property

6)      The amount of the deduction that the taxpayer is claiming

7)      Any terms or conditions which are attached to the property.

For property valued between $500 and $4,999, there are additional written requirements as well as the requirements above. According to the sec. 170 of the IRC, these records must include the approximate date the property was acquired and the manner of its acquisition.

For property valued at greater than $5,000, the taxpayer must also obtain a qualified appraisal of the item.

In conclusion, the doorknob hanger that you received for your contribution of clothes is NOT a proper form of documentation that will be sustained in an IRS audit. Make sure you keep the appropriate records.