With passage of the Revenue Reconciliation Act of 1993 (the "Act"), the burden for charitable organizations to report and substantiate charitable gifts has increased in two significant respects. First, a donor taxpayer must obtain a written acknowledgment for any contribution of $250 or more from a charity. Second, a charitable organization is required to disclose certain information to a donor in a written statement for any "quid pro quo" contribution received by the organization which exceeds $75.
This article will review the new rules in light of the temporary IRS regulations issued in May of this year.
New Donor Substantiation Requirements
Effective Date. The new substantiation requirement is effective for contributions made on or after January 1, 1994. Donors will have until the due date for filing their tax returns to obtain written acknowledgement from the charity.General Rule. A donor taxpayer will not be entitled to a deduction for any charitable contribution of $250 or more unless the donor has "contemporaneous" written substantiation from the charity. In cases where the charity has provided goods or services to the donor in exchange for making the contribution, the written statement must include a good faith estimate of the value of such goods and services (unless such goods or services are of insubstantial value).
This provision does not place an information-reporting duty on charities. Where an acknowledgment is required, the donor is responsible to obtain one from the charity and keep it with the donor's personal records.
Operational Rules
- The substantiation requirement applies to both cash and non-cash contributions.
- Cancelled checks alone do not constitute written acknowledgment of a charitable gift where the gift exceeds $250.
- A Form W-2 or other document from an employer that reflects charitable contributions made by payroll deduction, together with a statement from the charity that it does not provide goods or services in whole or partial consideration for any contribution made, will satisfy the substantiation requirements.
- Written acknowledgment from the charity must be "contemporaneous." This means that the acknowledgment must be obtained by the donor no later than the date the donor actually files a return for the tax year during which the contribution was made (including extensions). The acknowledgment need not be attached to the donor's return.
- The acknowledgment need not contain the donor's social security number.
- If goods or services are provided in consideration of the gift, the goods or services must be described and a good faith estimate of their value made (unless the goods or services are of insubstantial value). If the goods or services consist entirely of "intangible religious benefits," the statement should indicate this, but no value need be placed on these benefits. If nothing is received by the donor in return for the gift, it should be reflected in the statement.
There is no prescribed format for the written acknowledgment. A letter, postcard, or computer generated form is acceptable, provided it contains the following information:
- The amount of cash and/or a description of any property other than cash donated;
- Whether the charity provided any goods or services in consideration (in whole or in part) for the contribution; and,
- A description and good faith estimate of the goods or services provided by the charity.
Separate payments are generally regarded as independent contributions which are not aggregated with other contributions to determine whether the $250 threshold is met. (The IRS has the authority, however, to establish anti-abuse rules which will likely address the writing of several checks on the same day.) If a contribution is made by payroll deduction, each payroll deduction is a separate contribution.
Penalties
Any charity that knowingly provides false substantiation to a donor may be subject to the penalties for aiding and abetting an understatement of tax liabilities. (Code § 6701: $1,000 individual returns, $10,000 for corporation returns.)If the substantiation requirement is not met, the deduction will be denied even if there is other reliable evidence of the contribution.
IRS Guidance
The IRS is also exploring a method for organizations to report directly, to the IRS, all donations of $250 or more. If this report is developed, it would satisfy the donor's substantiation requirements for such gifts.Example 1
Independent Contribution. Once every three months, Mr. Smith sends a $200 donation to his church. He would not need written substantiation from the church for his total contribution of $800.Example 2
Anti-abuse. On Dec. 31, Ms. Brown writes 20 checks, each for $240, to her university alumni fund. Although each contribution is less than $250, the anti-abuse rule would presumably require written substantiation for what, in reality, is a $4,800 contribution.Recommendations
- For one-time contributions of $250 or more, a charity should consider providing a written acknowledgment at the time of the contribution. This will help "protect" early filers.
- A charity should routinely provide written acknowledgments after the end of the year, whether or not the donor is over the $250 amount. The statements should be out by January 31.
Disclosure by Charity of Receipt of Quid Pro Quo Contribution
General Rule. A charitable organization receiving a quid pro quo contribution in excess of $75 in connection with a solicitation must provide a written statement to the donor. The statement may be provided with the solicitation, or at the time of receipt of the quid pro quo contribution. (A "quid pro quo" payment is one which is partly a contribution and partly a consideration for goods and services received.)The statement should inform the donor of the amount of the contribution qualifying as a charitable contribution, along with a good faith estimate of the value of goods or services furnished by the donee to the donor.
Operational Rules. Separate payments at different times will not be aggregated for the $75 threshold.
The following items need not be valued:
- de minimus or token goods, or services (not exceeding $6.20 in cost); or,
- intangible religious benefits that are generally not sold in a commercial context.
Failure to provide the statement will result in a penalty to the charity of $10 per contribution, with a $5,000 cap per solicitation, unless noncompliance was due to reasonable cause.
The disclosure must be made in a manner that is reasonably likely to come to the attention of the donor. Institutions are cautioned not to bury the disclosure in fine print.