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While charities are not subject to IRS penalties for failing to issue donor receipts, there is a potential “donor relations” penalty if a donor’s tax deduction is disallowed due to an inadequate receipt. They must include these six items to meet the standards set forth by the IRS:
By Sarah Huang, CPA
It’s that time of the year. The phones are ringing with frantic calls from donors wanting receipts for prior year donations to support a deduction on their personal tax returns.
If your charity is receiving these calls, be aware: the IRS has been taking a harsh approach over the past few years and disallowing charitable donations simply due to the receipt not containing the required information. It’s time to take stock: are your donor receipts in compliance or are they preventing a donor from taking a charitable deduction?
While charities are not subject to IRS penalties for failing to issue donor receipts, there is a potential “donor relations” penalty if a donor’s tax deduction is disallowed due to an inadequate receipt. The donor may not make future donations and almost certainly will tell their friends that the denial of deduction was the charity’s fault.
The receipt can take a variety of forms – thank you note, formal receipt, postcard, etc. However, no matter the form, every receipt must include six items to meet the standards set forth by the IRS.
1. Name of the Charity and Name of the Donor
Each donor receipt should include the charity’s name and name of the donor. Many donor receipts also include the charity’s address and EIN, although not required. The donor, however, is required to have records of the charity’s address. As a best practice, charities may want to consider including this information in their receipts so the donor has all the required information needed to support a deduction.
2. Date of the Contribution
The contribution date technically isn’t required to be on the donor receipt. The requirement is that donors must keep records showing the date of their donations, either through cancelled checks, bank statements or credit card statements. Unfortunately, many donors don’t keep this information. When these records don’t exist, the IRS allows a donor receipt to serve as a record for the contribution date. This is why donor receipts should include the date of the contribution. If the donor receipt doesn’t include the date, the contribution may be disallowed entirely.
Determining the date of donation seems simple, but in many instances charities report the wrong date. Most of the issues seem to happen around year end, when a donor mails a check in December but the charity doesn’t receive it until January. Charities need to be extra careful in this situation and report the correct date on the donor receipt. Otherwise a donor may be disallowed a tax deduction in that year due to the incorrect date.
What is the proper date to report in the above scenario? For a donor who mails a check to a charity that properly clears the bank in due course, the contribution date is the postmark date on the transmittal envelope. For credit card donations, the date of the donation is the date on which the charge has been made, not the date on which the donor actually pays the credit card bill. There is some uncertainty as to what a charity should do when it receives a request to charge a credit card prior to the calendar year end but doesn’t do so until early January. The IRS has not provided any guidance on this situation. However, applying the logic that a donation is considered “made” at the time when the donor gives the charity the ability to access the funds, it seems reasonable that the contribution date should be the date on which the donor authorizes the transaction. This would be similar to a charity receiving a donation via check prior to year end but not depositing the check until the next calendar year.
3. Detailed Description of the Property Donated
For cash donations, the receipt should mention that cash was received. For noncash donations, a more detailed description of the item or items donated should be included. Multiple items of similar nature can be grouped, such as books, clothing, and decorations. However, try to be specific when possible since this receipt serves as the donor’s record for the noncash donation. For a donation of real property, it is recommended to put the physical location on the receipt, this way it will be easy for the IRS to match it to the property appraisal. For stock donations, the number of stock shares as well as the company name should be reported.
4. Amount of the Contribution
When cash is donated, the value is required to be included on the receipt. When a charity receives a noncash donation, the charity should never include a value of the item received on the receipt. The donor is responsible for obtaining a proper valuation for noncash contributions. Even if the charity is knowledgeable in valuing the item donated (such as a museum receiving artwork), the charity should never include the value on the donor receipt.
5. A Statement Regarding Whether or not Any Goods or Services were Provided in Exchange for the Contribution
This is one of the most important items to include in the donor receipt. Unfortunately it is one of the most commonly missed. The IRS has disallowed deductions to donors where the receipt does not contain this language. Something as simple as “no goods or services were provided in exchange for this donation” is all that is needed to meet this required element. For charities providing intangible religious benefits, a statement regarding the benefits should be included. A description of the benefits received is not required to be included. A simple statement such as the following will suffice: “The charity provided intangible religious benefits to the contributor.”
6.The Value of the Goods or Services Provided by the Charity to the Donor and a Statement Indicating the Tax Deduction may be Limited
When a charity provides something to the donor, information regarding the value of the goods or services provided should be included on the receipt. This is often called “quid pro quo”. Disclosure to the donor is required when the donor makes a donation of more than $75. Donations for $75 or less are generally excluded from this reporting. However, as a best practice charities may want to do so anyway.
Additionally, a statement should appear on the donor receipt indicating that the contribution deductible for income tax purposes is limited to the excess money contributed over the value of that received. Something such as the following is adequate: “Your charitable deduction for federal income tax purposes is limited to the excess of the amount of money contributed over the value of the goods or services provided by the charity.”
In some cases the value of the goods or services provided are so minimal that they are excluded from reporting to the donor. The rules are specific here and generally are only applicable when the item received is of minimal value, such as a logoed pen or hat. In most cases, the value is required to be reported to the individual. If the charity does not provide the value when it was required to do so, the IRS has the ability to assess penalties on the charity.
While these six elements may seem basic, the omission of one can have dire consequences for the donor and, potentially, the charity. Make sure your donor receipts are in compliance with these six requirements so you don’t inadvertently prevent a donor from taking a tax deduction.
This article should not be construed as tax advice. Before making any decision that may affect you or your organization, consult a qualified tax advisor or contact Clark Nuber.
This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.