By J. J. Harwayne Leitner, Esq., LaVerne Woods, Esq., and Coleen M. McGrath, Esq.
Anyone who has ever given to a charity is familiar with the contribution receipt: it thanks the donor for the contribution, indicates the dollar amount of the gift and states that the charity did not provide any goods or services in exchange for the contribution. While charities routinely issue these receipts, it is legally the donor who is required to obtain the receipt to claim the deduction.
Now, the IRS has proposed a new option for substantiating charitable contributions under which the recipient charity may elect to file a return with the IRS that includes certain required information.
Since 1994, the federal tax law has required donors who claim a charitable contribution deduction of $250 or more to substantiate it with a "contemporaneous written acknowledgment" from the recipient charity. The tax law provides an exception to the requirement if the recipient charity files a return with the IRS, "on such form and in accordance with such regulations" as the IRS may prescribe, reporting the contribution. The IRS had never issued regulations to implement the exception, however, because of its view that the written acknowledgment process works effectively.
That changed on September 17, 2015, when the IRS issued proposed regulations under which the donor's obligation to substantiate the deduction can be satisfied if the recipient charity elects to file a return with the IRS reporting the contribution. The charity's return must provide the charity's name and address, the donor's name and address, the donor's taxpayer identification number, the amount of cash and a description (but not necessarily the value) of any property other than cash contributed, whether the charity provided any goods or services in consideration for the contribution, and a description and good faith estimate of the value of any goods or services provided by the charity.
The impetus for the proposed regulations appears to have little to do with facilitating the contribution substantiation process for either donors or charities, however. Instead, the goal seems to be to strengthen the IRS's position in controversies with donors who have claimed charitable contribution deductions and have failed to substantiate them with the required written acknowledgement. The IRS presumably has denied the deductions on audit, but some donors have apparently taken the position that if the recipient charity reports the contribution on IRS Form 990, even an amended Form 990 filed years after the contribution, the reporting satisfies the exception to the requirement that the donor obtain a contemporaneous written acknowledgement. The proposed regulations, if they are finalized, will eliminate any basis for this argument.
The proposed regulations contemplate that the IRS will develop a specific-use information return for charity reporting of charitable contributions on which donors will be able to rely. The charity's Form 990 will not satisfy the substantiation requirement. Charities will not be required to file the contribution information form, or "donee report." The reporting will be purely optional. Charities that choose to file the report will also be required to provide a copy to each donor containing only the information specific to that donor. Under the proposed regulations, the charity must file the report with the IRS and provide the donor's information to the donor no later than February 28 of the year following the year in which the contribution is made.
The IRS will "store, maintain and readily retrieve the return information" if a donor is required to produce substantiation of a charitable contribution deduction in the course of an audit. If the recipient charity does not report a contribution on a donee report, then the donor will be required to produce the contemporaneous written acknowledgment as under current law.
The proposed regulations are not effective at this time, and will not become effective unless and until they are published in final form in the Federal Register.
It seems unlikely that many charities will opt to file the donee report if the proposed regulations become final. The proposed reporting would create yet another form for charities to complete and would impose the added burden of collecting and protecting donors' taxpayer identification numbers. Charities that have established systems for issuing written acknowledgements to donors likely will have no incentive to replace their systems with the proposed optional reporting to the IRS. It may be that the most significant outcome of the proposed rules will be to foreclose donors engaged in controversies with the IRS over their claimed charitable contribution deductions from successfully arguing that the recipient charity's Form 990 provides sufficient substantiation of the deduction.
For more information, in the Tax Management Portfolios, see Kirschten and Freitag, 521 T.M., Charitable Contributions: Income Tax Aspects (U.S. Income Series), Kirschten and Freitag, 863 T.M., Charitable Contributions: Income Tax Aspects (Estates, Gifts and Trusts Series), and in Tax Practice Series, see ¶2390, Charitable Contributions: Requirements for Deduction, ¶2395, Charitable Contributions: Substantiation Requirements.
This advisory is a publication of Davis Wright Tremaine LLP. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.
©2015 Davis Wright Tremaine LLP. ALL RIGHTS RESERVED
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