Donating to Charity may be a tax benefit but it also is a Red Flag for an IRS Audit

Giving to others is rewarding in and of itself, but it’s always nice to see your generosity provide you with a tax benefit and result in a lower tax bill. In our tax law practice we represent many individuals and one of the most often audited items on tax returns is the charitable deduction. The Charitable Contributions Deduction allows taxpayers to deduct their contributions to qualifying charitable contributions of cash and property within certain limitations.

Planning your charitable gifts and donations with a tax attorney can help you ensure that you receive full tax credit for your generosity. On a more sophisticated level, your tax attorney can also help you through tax planning when to make the gift and what type of property to give thereby maximizing the benefits of your generosity, and legally minimize your tax bill.

Having a tax attorney assist you is prudent because taking the charitable deduction may also raise your chances of an IRS audit. That is because one of the IRS audit indicators that IRS computers look for is the income level and the average charitable donation for similar income groups. See our article, The Audit Lottery Myth. Further, the IRS knows that compliance with documenting the deduction and/or taking the deduction correctly can be complicated. As such, it is an easy “money maker” for the IRS to just flag it and put the burden on the taxpayer to prove their entitlement to the deduction.

For instance, a client of ours manages his own charitable foundation. The IRS audited the tax returns and questioned that tax deductions and asserted that our client did not meet the Tax Code’s requirements. The Moskowitz Tax Attorneys defended our client’s right to tax status and won. This saved our client over 1.5 million dollars in taxes and penalties and the charity continues to exist today.

Also in our tax law defense practice the Moskowitz Tax Law firm defends individuals who are audited by the IRS and it turns out that they had made up the tax deduction or the audit triggers a further federal investigation. For instance, the following excerpt is from a press release issued by the US Attorney’s Office:

The indictment alleges that from December 2011 through February 2012, (NAME Redacted by author) obstructed the Internal Revenue Service by obtaining false documents that he intended to present to the IRS in support of deductions he claimed on his tax returns in 2007 and 2008. The indictment further alleges that during three separate interviews with special agents with the Internal Revenue Service – Criminal Investigation, (NAME Redacted by author) falsely told agents that he possessed original and legitimate documents to support the deductions on his tax returns, and denied that he had attempted to obtain false documents to support those deductions.

This case presents a number of challenges. This case seemingly involves a situation analogous to the ‘cover-up being worse than the original crime.’ From the criminal tax attorney’s perspective, negotiation of a plea agreement or providing defense thru trial, this taxpayer’s special knowledge of investigations and rights and oath of duty will have to be dealt with and presented in a way that will mitigate potential upward sentencing adjustments. Note, there are additional elements to this case that are not discussed here which should be considered.

For now and perhaps more importantly, this fact pattern shows how a seemingly simple tax dispute over a tax deduction can spiral into a very serious criminal tax matter. As here, an IRS audit or inquiry has led to criminal tax allegations and related crimes being charged where the defendant, now faces prison and monetary fines.

In conclusion, we can all agree that giving to charities is a good thing. It helps many people and causes and is basically an American way of life. Legislators agree and provide charitable givers with the incentive of a tax deduction. However, there are requirements you need to know in order to take advantage of the tax benefits and otherwise protect and assert your rights.

If you’re not sure how to account for charitable donations in your 2013 tax planning, or believe that the IRS has unjustly withheld this deduction in a past return, consult an experienced tax attorney at Moskowitz LLP in San Francisco. These tax attorneys and tax professionals can help you navigate the complexities of tax law.

Disclaimer: Because of the generality of this blog post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.