Charitable Contribution Disclosure Requirements: A Guide to Compliance With IRS Rules and Regulations

Virtually every nonprofit in the United States conducts fundraising activities in one way or another. These activities can include in-person solicitations, mail solicitations, phone calls, or special fundraising events. Charitable organizations exempt under section 501(c)(3) must understand the IRS regulations surrounding substantiation and disclosure requirements for charitable contributions in order to protect the tax-deductible nature of the donation as well as protect themselves from IRS penalties.

The tax regulations put the burden of obtaining the proper written acknowledgement of a contribution on the donor, not on the charity itself. An organization that does not acknowledge a contribution (subject to exceptions discussed below) incurs no penalty, but the donor will not be able to claim a tax-deduction. This could lead to unhappy donors who may choose to move their donations to other organizations in the future. It is critical for all charitable organizations to become familiar with and comply with the substantiation requirements to ensure their donors sustain their charitable contribution deductions. Here are some of the main requirements you should consider when acknowledging your donors:

Gifts Less Than $250
In order to claim a tax deduction for any contribution of cash, check, or other monetary gift a donor must maintain a record of the contribution in the form of either a bank record or a written communication from the charity showing the name of the charity, the date of contribution, and the amount of the contribution. While the IRS requirement for a written acknowledgement only applies to contributions of $250 or more, we recommend organizations send acknowledgement letters for all donations. This practice not only keeps you in contact with your donors, but most donors expect to receive acknowledgement of their donation no matter what the amount is.

Gifts of $250 or More
A donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous, written acknowledgement of the contribution from the recipient organization. Again, an organization that does not acknowledge a contribution of $250 or more does not incur a penalty, but the donor cannot claim the tax deduction without it. The written acknowledgement should contain the following information:

  • Name of the organization
  • Date of donation
  • Amount of cash contribution
  • Description (but not value) of non-cash contributions

The acknowledgement also needs one of the following depending on the circumstances of the donation:

  • Statement that no goods or services were provided by the organization in return for the contribution and that the only benefit to the donor was an intangible benefit, if that was the case, or
  • Description and good faith estimate of the value of goods or services provided in return for the contribution

Deadline for a Contemporaneous Acknowledgement
An organization is required to provide “contemporaneous” acknowledgement for contributions. For the written acknowledgement to be considered “contemporaneous” the donor must receive the acknowledgement by the earlier of: the date on which the donor actually files his or her tax return for the year of the contribution; or the due date (including extensions) of the return. Tax court rulings have denied charitable contributions for the mere fact that the acknowledgement letter was not “contemporaneous”.

Quid Pro Quo Donations
In addition to the requirements for documenting cash contributions, an organization that provides goods or services in exchange for a donation of more than $75 (such as meals and entertainment at a special event), must provide a written disclosure to the donor identifying the fair market value of goods and services received, and inform them that only the portion of the contribution that exceeds this fair market value is tax deductible. A donor may only take a contribution deduction to the extent the contribution exceeds the fair market value of the goods or services the donor receives in return for the contribution. The statement must be in writing and must be presented in a manner that is likely to come to the attention of the donor. A disclosure in small print within a larger document might not meet the requirement. The IRS may impose a penalty on an organization that fails to provide this disclosure. The penalty is $10 per contribution, not to exceed $5,000 per fundraising event or mailing.

Before you conduct your next fundraising activity you should take a movement to review your current policies and procedures to insure your donor acknowledgements comply with IRS regulations. Internal Revenue Service Publication 1771 provides some examples and guidance to help you substantiate the contributions you receive.

Congress Is Talking About the Charitable Contribution Deduction

congressOn Valentine’s Day, during the U.S. House of Representatives Ways and Means Committee hearing to address the itemized deduction for charitable contributions under the Internal Revenue Code, over 40 witnesses provided testimony lasting seven hours. The hearing was described as being part of the Committee’s ongoing work on comprehensive tax reform, similar to the hearing held leading up to the 1986 Tax Reform Act, the last time Congress “reformed” the Internal Revenue Code.

Rather than focusing on any specific legislative proposal, the Committee sought input from stakeholders on the importance of the charitable contribution deduction on the nonprofit community and the community at large.  The Committee also asked for suggestions for reform that would increase charitable giving.  Responses included extending the cutoff date to April 15th of the following year, allowing non-itemizers the charitable contribution deduction, and setting a minimum threshold on charitable contributions that would need to be met before becoming eligible for deduction. The Committee also discussed the substantiation and valuation measures for noncash contributions such as vehicle donations, enforcement of provisions on unrelated business income taxation, and incentives to encourage volunteering, such as an increased mileage reimbursement rate.

A witness representing the Business Coalition for Fair Competition suggested that Congress should examine the ways in which tax-exempt organizations currently compete with for-profit businesses, a topic often raised by those who believe some tax-exempt organizations compete unfairly with commercial businesses.  Adjusting the charitable contribution deduction could have dramatic effects on tax revenues, and it may be tempting for Congress to head down that path thinking those who give will continue to do so with or without benefit of the charitable contribution deduction.  Hopefully, Congress will remember the extent to which the tax-exempt organizations funded by charitable contributions relieve the burden that otherwise would fall on the federal government.  At the recently increased top federal rate of 39.6%, a dollar denied the charitable contribution deduction would bring less than 40 cents to the Treasury; should a donor decide not to contribute that dollar, the tax-exempt community loses a dollar.  The net effect is that those served by either the government or the tax-exempt community are out 60 cents.  That is probably not the intended result.

Contributed by Tim McCutcheon

Donation Substantiation

thank_you_note1As we approach the end of the year, many organizations may experience a flurry of donations. It is important to be aware of the related substantiation requirements.

Substantiation of cash donations can be fairly straight-forward. An organization can provide a statement including the name of the organization, the amount of the contribution, and a statement that no goods or services were provided by the organization in return for the contribution.

However, if any goods or services were provided in return for the contribution, there are additional substantiation requirements. A description and good faith estimate of the value of the goods and services must be provided to the donor. For example, attendees of gala events must be apprised of the portion of the ticket price that is deductible and the portion that is nondeductible.

There are additional provisions and some exceptions to the substantiation rules. Nonprofit organizations are encouraged to become familiar with the rules. IRS Publication 1771 contains helpful information.