Don't Mess With Taxes

Spring is the traditional time to clean out all the junk you've accumulated.

Our neighborhood has a community yard sale the first weekend in May. Some of what doesn't get sold ends up going to local charities.

That's a good way to dispose of clothing and household goods that are in good condition and, if you itemize, claim a tax deduction.

Follow donation rules: The state of the donated goods is just one of the conditions you must take into consideration, especially if you're planning to deduct their value as an itemized charitable gift.

The other key donation deduction factor is the value of the household goods. Internal Revenue Service rules allow you to use their fair market value. This, like the tags on the items at yard sales, is the price a buyer is willing to pay.

Sellers at garage or yard sales know that the prices typically are much less than what was paid for the item. Even in good shape, they've usually been used for several years. And let's be honest, you just want to get rid of the stuff.

In most cases, when you donate goods to a charitable group, the IRS lets you decide the value. In some cases, though, you must get some additional support for the amount you are claiming on Schedule A as a charitable gift.

Failure to do that left one seemingly generous donor with a tax deficiency the IRS put at more than $6,000. Plus penalties.

Very generous donations: In 2017, a North Carolina man made 173 trips to his local Goodwill and the Salvation Army branches to donate men's, women's, and children's clothing that was in good shape, along with various nonclothing items, according to the Tax Court ruling in T.C. Memo 2023-41.

Sometimes he made multiple trips to the donation drop-off spots on the same day. Each time, he got a donation acknowledgement receipt from the charities for each trip. He subsequently filled out the receipts, listing the items donated and their fair market values.

The Goodwill gifts came to $18,837, consisting of clothing with a $13,852 fair market value, and non-apparel items totaling $4,985. Salvation Army donations totaled $11,779, consisting of $11,594 worth of clothing, and other items valued at $185.

So far, so good.

When it came time to file his taxes, he claimed the gifts totaled more than $25,000. To justify the deduction, he attached two Forms 8283 to his return.

But then, according to the IRS, he made a mistake. He failed to get a written appraisal of the donated goods' values.

Appraisals required for high-value donations: The taxpayer argued that he didn't need the appraisal because he didn't donate any individual item worth more than $5,000. However, he misread the appraisal rules.

All similar donated property is aggregated. And since he donated more than $5,000 worth of clothes to the two charitable organizations, he needed a qualified appraisal signed by a qualified appraiser in order to make a valid itemized deduction claim.

If you want the Internal Revenue Code specifics, the Tax Court decision provides it:

As indicated supra p. 16, for purposes of determining the $5,000 threshold and accordingly whether the "appraisal" requirements are applicable, section 170(f)(11)(F) and Treasury Regulation § 1.170A13(c)(1)(i) mandate aggregating similar items of property donated to one or more charitable organizations.

Petitioner's Goodwill and Salvation Army receipts reflect donations of men's, women's, and children's clothing, as well as various nonclothing items.

Pursuant to section 170(f)(11)(F) and Treasury Regulation § 1.170A-13(c)(1)(i), all the clothing donations must be aggregated.

The aggregate amount we're talking about, per the Tax Court's math, was $25,446 — $13,852 in clothing donations to Goodwill, and $11,594 in apparel dropped off at Salvation Army. That total, notes the court, "is over five times the $5,000 threshold and thus necessitates that they be appraised."

Pay attention to the form requirements: To compound his problem, the taxpayer submitted two separate Form 8283 Noncash Charitable Contributions, one for each charitable organization, with his 2017 return.

And, as the Tax Court decisions notes, "All information about these gifts was reported only in Section B for 'Donated Property Over $5,000 (Except Publicly Traded Securities)' on the forms." That Form 8283 section is shown below.

…

See more tax forms and more about them at Tax Forms 2023.

"In that section on each form petitioner indicated that he had donated 'VARIOUS' property in 'Good used' condition; for the gifts to Goodwill he indicated that the property had an '[a]ppraised fair market value' of $10,286; and for the gifts to the Salvation Army he indicated that the property had an '[a]ppraised fair market value' of $10,060," continues the Tax Court analysis.

So, by his own tax return reporting, the taxpayer was required to have obtained and attached a qualified appraisal for the "various" property summarized in Part B of each Form 8283. "He did not," noted the Tax Court.

Deductions disallowed: The bottom line is that the North Carolina donor does not get all his deductions* and therefore isn't entitled to the $13,194 refund he originally calculated on his 2017 return.

The bottom-line result was that the Tax Court upheld the IRS' determination that the North Caroline man's incorrect deductions* mean he owes $6,307 more in federal income tax. The IRS also was granted the accuracy-related penalty of $1,261 for the 2017 taxable year that it "automatically calculated through electronic means."

As with most things tax, this case was a bit more complicated. The taxpayer also had some Schedule C sole proprietorship business mileage claims that were questioned, which is the reason for the previous paragraph's *asterisk.

The loss of any refund is noteworthy. That's why the ultimately disallowed refund of $13,194 that was achieved by improper deductions is this weekend's By the Numbers figure.

The IRS audit and Tax Court ruling also highlight the responsibility of all taxpayers, whether claiming a business write-off or a personal charitable deduction, to know the tax law (professional advice could definitely help here) and correctly substantiate all claims.

You also might find these items of interest:

• 6 tax donation deduction tips for Giving Tuesday
• Valuing tax-deductible donated clothing & household goods
• Bipartisan group of Senators seeks return of Form 1040 direct charitable tax deduction

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