Don’t Lose Your Deduction on Technicalities

By Steve Stucky, CPA, Partner at Sikich LLP

There is a lesson to be learned from David and Veronda Durden. The couple was denied a $25,000+ deduction on their tax return for a charitable donation they made to their church because of a simple technicality. The IRS disallowed the deduction, increasing their tax liability by thousands of dollars because the proof they had confirming the donation didn’t meet all of the IRS’ strict requirements. The most shocking part is the Tax Court recently ruled in favor of the IRS, leaving no recourse for the generous couple.

The Durdens made the contributions over the course of one year by writing checks—all more than $250 each. At the end of the year, the church sent them an annualized summary of the donations, which the Durdens kept as proof. The IRS argued that the annualized summary failed to meet the four requirements needed for proof of a cash donation more than $250 and therefore was not valid. The four requirements include:

1. It must be in written form and contemporaneous, meaning you must receive the proof by the tax return’s due date or by the date you actually file the tax return—whichever is earlier.
2. The proof must include the amount donated.
3. The proof must state whether the recipient organization provided any goods or services in consideration for the donation.
4. If any goods or services were received, the proof must include a good faith estimate of their value. If the donors only received “intangible religious benefits,” then it must explicitly state that.

The summary that the Durdens received did not meet the fourth requirement. They argued that they “substantively” complied and that it was just a technicality that the proper language wasn’t on the annualized summary. The IRS and the Tax Court did not care. Don’t expect the IRS to be reasonable when it comes to getting more of your money, whether it comes to your charitable donations or just general business deductions. Take every precaution and follow every regulation to the letter. The church already qualifies as a nonprofit charity, and almost all church members regularly contribute their monies through the collection plate, which seems to meet the “intangible religious benefit.” This seems like a good chance for reversal, but that takes time, effort and money to challenge the IRS. A simple solution is for all nonprofits, including churches, to include this additional language on summaries on a regular basis.

FMI, contact By Steven K. Stucky, CPA; Partner, Sikich LLP. Steven can be reached at 317-842-4466 sstucky@sikich.com.