The Importance of Documenting Charitable Contributions

We’ve been covering charitable contributions recently, and this Tax Court case from 2010 fits in nicely with that series of articles.

The Tax Court case involved a couple from California who had more than $27,000 of charitable contributions disallowed by the IRS on their 2006 tax return.  The Court ruled against the couple, costing them nearly $11,000 in taxes and penalties.

The case centered around a lack of documentation for the contributions.  According to the Court report, the taxpayers had no receipts for any of the contributions they made.  In one instance, the couple donated items to the Salvation Army and could have gotten a receipt, but chose not to because they “didn’t want to wait in line to get one.”

The taxpayer told the Court that he kept a journal that detailed all of the contributions, but the journal was stolen when his car was broken into in 2007.  When things like that happen, a taxpayer can reconstruct their deductions using credible evidence.  In this case, though, the only evidence offered was the testimony of the taxpayer.  The couple also tried to invoke the “Cohan Rule,” which allows for the use of reasonable estimates (the Cohan Rule is another blog post for another day), but again, the taxpayer has to have credible evidence on which to base the estimates.

In the end, the taxpayers lost $27,000 in deductions for charitable contributions, amounting to additional tax owed of $9,011.  The Tax Court also found the couple to be subject to the 20% “negligence penalty,” which tacks on another $1,802 in penalties.  In ruling that the couple was negligent, the Court said:

Even if (the taxpayer’s) journal was in fact stolen, there is no evidence that he made a reasonable attempt to reconstruct his contributions.  We therefore hold that the petitioners failed to meet their burden of showing that the reasonable cause and good faith exception applies.  Accordingly, the Court concludes that the petitioners are liable for the … accuracy-related penalty….

The moral?  Keep good records, and if your records are lost, destroyed or stolen, do all you can to reconstruct them!  The IRS will not rely on your “word” alone.  That goes for all your tax-related records, not just records of charitable contributions.