With January now in the rearview mirror, many charities have wrapped up their gift acknowledgment letters for 2021, thanking donors for their generosity and assisting them with their preparations for the upcoming tax season. The IRS’s rules for such acknowledgment letters are fairly simple, but their simplicity belies their rigidity: even the most (seemingly) minor misstep can have major tax consequences for donors. As the Tax Court cases below make clear, only strict compliance will do.
To summarize the rules: Generally, donors are required to maintain a bank record (i.e., cancelled check) or written documentation (i.e., receipt or letter including the charity’s name, date and amount of donation or detailed description of donated property) from charitable organizations prior to claiming a charitable contribution deduction on their federal income tax returns. In addition, donors must obtain a contemporaneous, written acknowledgment for any single cash or non-cash contribution to a charity valued at $250 or more. The written acknowledgment must include basic identifying information, such as the name of the organization, date of receipt of the contribution and either the amount of the cash contribution or a detailed description (excluding the value) of any non-cash contributions.
Further, under the IRS’s rules, acknowledgment letters must include an affirmative statement that no goods or services (for example, meals or entertainment) were provided by the organization in exchange for the contribution or a description and good-faith estimate of the value of goods and services that the organization provided in exchange for the contribution.
To be considered “contemporaneous,” donors must receive the acknowledgment by the earlier of either (i) the date on which the donor actually files his or her individual federal income tax return for the year of the contribution; or (ii) the due date (including extensions) of the individual income tax return. As the IRS notes in its key publication, Publication 1771, organizations typically issue written acknowledgments no later than January 31 of the year following the contribution.
While charities themselves do not incur penalties for failure to issue written acknowledgments, the stakes are high for donors. For example, in David P. Durden, et ux. v. Commissioner, a church failed to include the required “no goods or services” statement in its acknowledgment letter. This omission was seemingly harmless because no goods or services were in fact provided to the donor. However, the donor’s deduction was nonetheless disallowed by the IRS because the acknowledgement letter rules were not strictly complied with. The donor challenged the IRS and took his case to Tax Court, but the IRS’s position was upheld. Even after obtaining a second written acknowledgment two years later, this time with the required language, the deduction was still denied because the new letter was no longer considered a contemporaneous acknowledgement.
Similarly, in Betty Kendrix v. Commissioner, the donor’s charitable deduction claims were denied for several reasons, including a critical failure to provide sufficient detail and description of donated property, such as its quality, age or condition. The receipt in question did, in fact, set forth a list of items (e.g., furniture, beds, TV, VCR, dinner set, stove, “old” recorder) and a total estimated value, but the lack of any further details prevented the IRS from being able to determine the value at the time of donation. As in the previous case, the donor attempted to cure these mistakes using a worksheet she prepared and attached to an amended Form 8283 used to report noncash charitable contributions. However, the worksheet was rejected because it was not prepared contemporaneously with the contributions which cast doubt on the reliability of the donor’s supporting documentation.
These cases make clear that there is only one way to help your donors reap the tax benefits of their charitable contributions – strict compliance! The IRS has published clear guidance outlining the requirements of written acknowledgements and conforming your templates to include such information will aid donors in successfully preparing their taxes each year.
If you have any questions or concerns related to the content of your gift acknowledgment letters, issues involving charitable donations or other matters involving 501(c)(3) tax-exempt organizations, please contact Thomas W. Simcoe, Delaney M. R. Knapp or the attorney at the firm with whom you are regularly in contact.
With January now in the rearview mirror, many charities have wrapped up their gift acknowledgment letters for 2021, thanking donors for their generosity and assisting them with their preparations for the upcoming tax season. The IRS’s rules for such acknowledgment letters are fairly simple, but their simplicity belies their rigidity: even the most (seemingly) minor misstep can have major tax consequences for donors. As the Tax Court cases below make clear, only strict compliance will do.
To summarize the rules: Generally, donors are required to maintain a bank record (i.e., cancelled check) or written documentation (i.e., receipt or letter including the charity’s name, date and amount of donation or detailed description of donated property) from charitable organizations prior to claiming a charitable contribution deduction on their federal income tax returns. In addition, donors must obtain a contemporaneous, written acknowledgment for any single cash or non-cash contribution to a charity valued at $250 or more. The written acknowledgment must include basic identifying information, such as the name of the organization, date of receipt of the contribution and either the amount of the cash contribution or a detailed description (excluding the value) of any non-cash contributions.
Further, under the IRS’s rules, acknowledgment letters must include an affirmative statement that no goods or services (for example, meals or entertainment) were provided by the organization in exchange for the contribution or a description and good-faith estimate of the value of goods and services that the organization provided in exchange for the contribution.
To be considered “contemporaneous,” donors must receive the acknowledgment by the earlier of either (i) the date on which the donor actually files his or her individual federal income tax return for the year of the contribution; or (ii) the due date (including extensions) of the individual income tax return. As the IRS notes in its key publication, Publication 1771, organizations typically issue written acknowledgments no later than January 31 of the year following the contribution.
While charities themselves do not incur penalties for failure to issue written acknowledgments, the stakes are high for donors. For example, in David P. Durden, et ux. v. Commissioner, a church failed to include the required “no goods or services” statement in its acknowledgment letter. This omission was seemingly harmless because no goods or services were in fact provided to the donor. However, the donor’s deduction was nonetheless disallowed by the IRS because the acknowledgement letter rules were not strictly complied with. The donor challenged the IRS and took his case to Tax Court, but the IRS’s position was upheld. Even after obtaining a second written acknowledgment two years later, this time with the required language, the deduction was still denied because the new letter was no longer considered a contemporaneous acknowledgement.
Similarly, in Betty Kendrix v. Commissioner, the donor’s charitable deduction claims were denied for several reasons, including a critical failure to provide sufficient detail and description of donated property, such as its quality, age or condition. The receipt in question did, in fact, set forth a list of items (e.g., furniture, beds, TV, VCR, dinner set, stove, “old” recorder) and a total estimated value, but the lack of any further details prevented the IRS from being able to determine the value at the time of donation. As in the previous case, the donor attempted to cure these mistakes using a worksheet she prepared and attached to an amended Form 8283 used to report noncash charitable contributions. However, the worksheet was rejected because it was not prepared contemporaneously with the contributions which cast doubt on the reliability of the donor’s supporting documentation.
These cases make clear that there is only one way to help your donors reap the tax benefits of their charitable contributions – strict compliance! The IRS has published clear guidance outlining the requirements of written acknowledgements and conforming your templates to include such information will aid donors in successfully preparing their taxes each year.
If you have any questions or concerns related to the content of your gift acknowledgment letters, issues involving charitable donations or other matters involving 501(c)(3) tax-exempt organizations, please contact Thomas W. Simcoe, Delaney M. R. Knapp or the attorney at the firm with whom you are regularly in contact.
