Whenever you donate $250 or more to charity, you need paperwork to back up your donations.
* You must get a written acknowledgment from the charity, spelling out the amount of the donation.
* The acknowledgment must be "contemporaneous" (around the time of the contribution).
* The acknowledgment must say whether the charity provided any goods or services in exchange for the gift and, if so, it must put a value on those goods or services.
In a recent case, the Tax Court considered a $25,317 charitable deduction claimed by a married couple. Most of the contributions were made by check to the couple’s church, and those checks were almost all for amounts greater than $250.
When the IRS questioned the deduction, the taxpayers produced a letter from the church, acknowledging receipt of the checks. Moreover, the letter was sent just after the year of the contributions, so timeliness wasn’t as issue.
Nevertheless, the IRS disallowed the claimed deduction, and imposed penalties as well. The problem: the letter from the church failed to say whether the donors received any goods or services in return for their contributions. The Tax Court ruled for the IRS, disallowing virtually all of taxpayers’ charitable deductions, because they failed to comply with "the clear substantiation requirements" of the tax code.
The message is that the IRS and courts can be very tough on charitable contributions. For donations of $250 or more, don’t throw out the thank-you letters you get from the charity. Make sure the letters say whether you received anything in return, and keep the letters for at least three years after filing the return.
