Abuse of Charitable Organizations and Deductions included in 2010 Dirty Dozen Tax Scams

Every year the IRS releases its “Dirty Dozen” list of tax scams. The list serves both as a warning of scams for taxpayers to avoid as well as a reminder of the IRS’ investigation and enforcement role. This year, the list includes “Abuse of Charitable Organizations and Deductions”  which provides:

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

Donors donating in-kind goods and claiming significant deductions for the contribution should expect extra scrutiny this year.  Generally, donations of property (other than cash, inventory, publicly traded stock, or intellectual property) in excess of  $5,000 require qualified appraisal. Also, any single item of clothing or any household item that is not in good used condition or better and for which the donor deducts more than $500 requires a qualified appraisal. The appraisal must meet the definition of a “qualified appraisal” which requires specific information to be included and must be prepared by a qualified appraiser who meets certain qualifications. If the donor does include the appraisal with his or her tax return or if the appraisal does not meet the specific criteria for a “qualified appraisal,” the donor cannot deduct the contribution. The qualified appraisal and qualified appraiser rules impose high standards that are extremely specific. Care should be taken to ensure the appraisal and appraiser meet these standards.