Tough IRS Stance on Charitable Substantiation Rules

A recent Tax Court decision (Mohamed, TC Memo 2012-152) supports the draconian results which IRS will impose when taxpayers don’t observe the substantiation rules for charitable contributions of property valued at more than $5,000.

Taxpayers Mr. and Mrs. Mohamed prepared their own returns for 2003 and 2004. Mr. Mohamed is a real estate broker, and a certified real estate appraiser. He included IRS Form 8283 (related to his claimed charitable contributions valued in the millions) though he used his own appraised values (rather than those of an independent appraiser) for the properties, which the IRS, upon audit, didn’t consider sufficient compliance with the rules.

And after the audit commenced, the taxpayers did hire independent appraisers, who eventually came up with values actually greater than amounts claimed by the taxpayers. But IRS stood their ground, denying all deductions!

The Tax Court agreed with IRS’ position that the taxpayers hadn’t properly complied with the substantiation requirements – largely because Mr. Mohamed wasn’t an eligible “qualified appraiser” because he was not only the donor and the taxpayer claiming the deductions, but also the donee in his capacity of trustee of the charitable remainder trust which was the recipient.

Nor would the Court accept the taxpayers’ argument that even though they may not have followed the “letter of the law” in documenting their claimed donations, their deductions should be upheld because they “substantially complied” with the rules!