Nobody wants this to happen to them. "We are disallowing the [non-cash charitable donation] receipt dated 05/12/07 and one item on the receipt dated 10/15/09. The reason these are being disallowed is because we need a list of the items that were donated," explains the IRS to a taxpayer being audited.
Determining the value of non-cash contributions is quite subjective. While pretty much every other tax break is calculated based on the amount of money spent during the year, contributions of clothing and household items are claimed based on an estimate of the fair market value of each item donated. Since this tax break provides taxpayers with an opportunity for exaggeration, non-cash contributions are definitely on the IRS' radar screen.
"One big hurdle for people looking to claim this tax break came about in 2006, when Congress instituted a higher standard for deducting non-cash contributions," says Andrew Schwartz CPA of Woburn, MA. "Under the current rules, you can only claim a deduction for non-cash contributions that are in 'good condition or better'. Please note that as part of this change, the IRS now routinely requests a list of each item donated, including its condition and fair market value, from most taxpayers who are being audited."
UDoGood App Can Help
Properly documenting and valuing donated clothing and household items has become more important now that only those items in good condition or better qualify for a deduction. Anyone unlucky enough to get audited will learn that the IRS will most likely use this new higher standard as a way to greatly reduce the deduction claimed - unless that taxpayer is able to substantiate that the donated goods were in good condition or better, and can also demonstrate how he or she came up with the total fair market value.
To easily track and put a value on the goods donated each year, make sure to use UDoGood, a new (and fun) App for the iPhone and iPod touch that helps taxpayers document charitable donations of clothing and household goods. "UDoGood includes suggestions to help you determine the fair market value of your donations," explains Bill Rounds, one of the App's developers. "If you have an iPhone, UDoGood also lets you take photos of your donations to provide a visual record of your contributions. And with UDoGood, you can e-mail your list of donated goods to your tax preparer or to yourself."
"Understanding the post-2006 rules and using UDoGood to document what you give away is the winning combination to ensure that the deduction you claim on your tax return is fairly stated and will also withstand reasonable scrutiny from our friends at the IRS," says Schwartz.
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