Knowledge is protection when the IRS is involved. I'm Darrin Mish, a tax attorney in Tampa with 32 years of experience representing taxpayers nationwide. Here's what I want you to understand.
If you claim a tax deduction, there are rules you have to comply with. It pays to know these rules and abide by them. This is because when it comes to getting money from the government, Uncle Sam can be a stickler for detail. In difficult economic times like the one we are in now, the IRS is trying its very best to close the tax gap, which is the difference between the amount of taxes the government is estimated to collect and the amount that is actually collected. The tax gap is mainly due to non-filers (those who do not file tax returns although they are taxable) and under-filers (those who under-declare their income in their tax returns). Then there is also a third group that contributes to the tax gap – those who pay less than the amount they owe according to their tax return. The tax gap amounts to billions of dollars every year. So if you are claiming a tax deduction, you should comply with all the rules otherwise, your claim may very well be rejected. Click here to read or watch more IRS Help resources.
Here’s one such rule pertaining to tax deductions. The law states that if you claim a tax deduction for a charitable donation of $250 or more, you are to provide a letter from the charitable organization that shows the amount of cash you contributed and a description of any non-cash item you donated. The letter must also confirm that no goods or services were given to you in consideration of your contribution otherwise you might not be eligible to claim the full amount you contributed. For example, if you made a donation at a charity dinner, the charitable organization must state that you received “services” in the form of a charity dinner and the value of the dinner is to be deducted from your claim. Furthermore, such a letter from the charitable organization must be submitted to the IRS by the deadline for tax submissions on the tax year the contribution was made or the date of your tax submission, whichever is earlier.
In a real life case illustrating this, the taxpayers were penalized for not complying to these rules. In Durden v. Commissioner (T.C. Memo 2012-140 (May 17, 2012), the taxpayers Mr. and Mrs. Durden claimed a legal tax deduction for charitable donations they made amounting to $25,171 in their 2007 tax returns. Most of this amount went to a church that was a tax-free organization under Section 501 (c) (3) of the Income Tax code that is eligible to receive tax-deductible donations. All the checks the Durdens wrote were for more than $250 except for five of them. When the IRS received the Durdens’ tax claim, they sent a letter requesting confirmation. The Durdens duly complied by sending copies of their checks and a letter of confirmation of donation from the church. This letter was rejected by the IRS because it did not state whether any goods or services were given by the church in consideration of the Durdens’ donation.
The Durdens responded by sending another letter from the church that confirmed no goods or services were given to them. But this letter was received after the tax return had already been filed and was duly rejected by the IRS. The Durdens took the matter to court and the tax court recently ruled against the Durdens because they did not comply with the requirements of the tax rules.
So the lesson to learn here is that compliance to tax rules is imperative in making tax deduction claims.