End of the year gifting

Michael-NelsonHello to you as this Holiday Season is now upon us with such energy and joy of families being together after a long year. I wish you a safe and happy Holiday and a great New Year.

As a tax attorney, I just can’t stop thinking of last minute tips that may help you and me for April’s filings. Charitable giving is mostly done between now and December 31st, so here is a bit of back ground and what to do when you make gifts to charities.

On September 18, the Department of the Treasury and Internal Revenue Service (the “IRS”) proposed regulations relating to the substantiation of charitable contributions made to Section 501(c)(3) organizations. If approved, the proposed regulations would expand the ways in which charities can acknowledge donations. Under the current regulations, charities must provide a contemporaneous written acknowledgement to donors who contribute $250 or more stating (i) the amount of cash and a description of any property other than cash contributed; (ii) whether any goods or services were provided by the organization in consideration of the contribution; and (iii) a description and good faith estimate of the value of any goods or services provided. This acknowledgement is routinely provided as part of the “thank you’s” sent out by charities for contributions they receive, including those that fall below the $250 threshold.

Donors are required to keep these acknowledgments on file in order to substantiate their charitable donations in case of audit. In recent years, however, a number of donors who failed to keep such records sought to substantiate their donations under a previously unexplored provision of the Code, which allows an organization to substantiate a donation by filing a return (using a form prescribed by the Secretary of the Treasury) including the information described above. The Secretary of the Treasury has never created such a form, and the proposed regulations respond to donors who have argued that organizations could simply file an amended Form 990 to substantiate donations.

Under the new regulations, the IRS would create a new form, which an organization could choose to file with the IRS following the calendar year in which donations are made, instead of sending the customary acknowledgment letter. The form would require the organization to collect and maintain information about the donor, including his or her taxpayer identification (or social security) number.

Comments on the proposed regulations were due on December 16, and numerous organizations, including the American Bar Association, submitted comments that were emphatically opposed to, and critical of, the proposed regulations. Many commenters have noted that the current system works well. Moreover, given growing concerns about cybersecurity and data breach, commenters were concerned about whether organizations (or indeed the IRS) could properly protect the information they collect and whether fear of data breach might dissuade donors from contributing.

The regulations have also attracted criticism from federal lawmakers. On December 11, Senator Patrick Roberts (R-KS) introduced a bill to block the regulations, arguing, among other things that because the IRS “has not yet adequately addressed the issues surrounding breaches of existing taxpayer information, a point the IRS readily acknowledges, and states that the existing system of substantiating charitable contributions works well, there is no compelling tax administration or enforcement reason to move forward with this proposal.”

Based on their reception to date, even if the new regulations were to be approved, it seems unlikely that many organizations would change their current method of substantiating donations. Donors are therefore reminded that the holiday season is not just a time for writing thank you notes for gifts they receive, but for carefully saving the thank you notes they receive from their charitable beneficiaries.

All my best to you,