The Internal Revenue Service recently warned (IR-2023-185: IRS warns taxpayers of improper art donation deduction promotions; highlights common red flags) taxpayers of improper art donation deduction promotions for which it already has active promoter investigations and taxpayer audits underway. The promotions generally involve exaggerated art donation deductions, whether by inflated values or questionable appraisals. Promoters encourage taxpayers to purchase various art at a “discounted price,” wait at least one year to donate the art that they “promise” will be worth significantly more at that time, and then take a deduction for an inflated fair market value. According to the Internal Revenue Service, more than 60 taxpayer audits have been completed as of early October, producing more than $5 million in additional tax. With an even wider gap now between taxes owed and paid to the government, this warning is just another reminder of the Internal Revenue Service’s focus on increasing compliance efforts on high-income and high-wealth individuals to ensure filers pay the right amount of tax owed.

To properly claim a charitable contribution deduction of art, taxpayers must retain certain records to prove the name and address of the recipient charitable organization, the date and location of the contribution, and a detailed description of the donated art. In addition, depending on the value of the claimed deduction, a taxpayer may need to: (1) obtain a contemporaneous written acknowledgement of the contribution from the organization receiving the art; (2) complete and attach Form 8283, Noncash Charitable Contribution, to their tax return; (3) obtain a qualified written appraisal of the donated property; and, (4) if the donation is more than $20,000, attach a complete copy of the qualified appraisal to their tax return and have a high-resolution photo or digital image of the object ready to submit, if requested. These substantiation requirements should not be taken lightly. Any failure to comply with the above may result in the Internal Revenue Service’s review of a filed return as well as an adjustment to the amount of tax originally reported, with additional penalties and interest due.

Thank you Michelle E. Espey for this week’s Tax Tracker!