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Recent court decisions and the Internal Revenue Service (IRS) Chief Counsel Memorandum (CCM) reinforce the need to keep accurate records and adequately disclose all charitable contributions as well as gifts made to others.

A recent court decision denied an income tax deduction of over $145,000 for a series of charitable contributions for numerous individual household and personal items because the taxpayer failed to provide adequate substantiation. For all contributions of property, a taxpayer must maintain reliable written records for each item donated. These records must include name of donee, date and location of contribution, and a reasonable detailed description of the property including its value. 

For all contributions valued at $250 or more, the taxpayer must obtain contemporaneous written acknowledgement from the donee. Contributions of property with a claimed value exceeding $5,000 (other than publicly traded securities), the taxpayer must obtain a qualified appraisal of such property.

In a separate case, the IRS disallowed the entire donation of a property interest valued at over $3 million due to the omission of the cost of the property interest when disclosing the gift to the IRS. Substantiation requirements are intended to alert the IRS to potential overvaluations of contributed property and deter taxpayers from claiming excessive deductions.

When it comes to making gifts to family members, a recent IRS CCM advised that the statute of limitations for gift tax returns for gifts made over the past seven years was still open. Thus, the gift tax was still assessable because the donor never filed gift tax returns (Form 709) which adequately disclose the transfers. The IRS normally has three years after a tax return is filed to assess additional tax. However, the statute of limitations does not begin to run until a tax return is filed and any gifts made are adequately disclosed within that return. So if a return isn't filed the IRS could still catch up with you later even after you are deceased, since they can make adjustments for the prior gifts when they audit your estate tax return.

The moral of the story with either charitable contributions or gifts, is that good records should always be maintained and any large contributions or gifts should be discussed with your tax advisor to make sure everything is being done to properly document and claim your tax deduction or avoid future additional tax assessments. Contact your local UHY LLP professional.