Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.
For the average person, there’s nothing more terrifying than the thought of getting an IRS audit. It ranks right up there with fears of dentists, flying, and clowns for some people.
This fourth installment in our series on tax audit red flags focuses on charitable donations. No, this is not to say you shouldn’t give to charity. It’s just to remind you that if you aren’t careful in your giving, you could be bringing a little undesired attention upon yourself by the IRS.
Goodwill donations are great. They are made for a good cause as the items you donate create jobs and help families with less means enjoy items that no longer have value to you.
However, if your charitable contribution is disproportionate to your income, it raises a red flag with the IRS. That’s because the IRS is seemingly omniscient and knows just what the average charitable contribution is for someone in your tax bracket.
In addition, your chances of a tax audit increases if you have noncash charitable donations over $500 and fail to file Form 8283: Noncash Charitable Contributions.
Claiming tax deductions for the full retail value of the item, rather than the resale value of the item is also an IRS no-no. It is a good idea to get an appraisal for the value of all donated property.
What can you do to decrease your risk of raising this red flag?
– Avoid giving more than the average for your income bracket.
– Even if you feel you have a legitimate reason for donating heavily to a specific organization, it’s wise to resist the temptation to make one large lump sum donation if your goal is to avoid unwanted scrutiny by Uncle Sam’s tax man.
– Don’t forget to keep accurate records of your donations as well.
– Photographs of donated items are wise as well in case questions arise at a later date.
To learn more about IRS red flags, keep an eye out for the next article in the series: Tax Audit Red Flag #5 – Money Losing Business(es).