Ever on the lookout for questionable numbers on tax returns, the Internal Revenue Service has a system of "audit flags" that score each return for the probability of financial falsehoods. This discriminant inventory function, or DIF, system will attach a higher score to returns showing an unlikely amount of charitable contributions. Before you take that particular deduction, it's good to look at it carefully -- and from the IRS' point of view.
Taking the Charitable Deduction
Federal tax laws allow you to write off qualified donations to charitable organizations. You must file Schedule A and list the donation as an itemized deduction. The donation must be to a qualified charity; the IRS keeps a complete database of these.The agency also wants you to keep records and receipts of cash contributions, and if you contribute more than $500 worth of non-cash goods, you must file Form 8283, Noncash Charitable Contributions.
The amount of your charitable deduction may alert the DIF system used by the IRS. The agency's computers track the average "donation ratio" for your income level and compares that number to the amount you're claiming. In 2011, for example, for returns showing adjusted gross income between $35,000 and $40,000, the average claimed cash contribution was $2,036. Claiming contributions well in excess of the average ratio raises an audit flag; the IRS website offers a complete set of data breaking down itemized deductions by type, total returns claiming the deduction and total amount claimed.
Donating non-cash items to a charity will raise an audit flag if the value exceeds the $500 threshold for Form 8283, which the IRS always puts under close scrutiny. If you fail to value the donated item correctly, the IRS may deny your entire deduction, even if you underestimate the value. In addition, if you fail to provide an appraisal of any single item valued at more than $5,000 -- Section B of Form 8283 -- an audit of your return may be the response.
Other Auditable Issues
The IRS will also respond if you attempt to claim the donation of your time or services, no matter the amount. These are not considered deductible donations and may trigger an audit. Many IRS audits are relatively simple "correspondence audits," in which you get a notice through the mail and a request for documents. In response to a mistake, the IRS may simply deny your deduction, send a correction of your tax return and bill you for the higher tax. This would happen, for example, if you exceed the limit for the charitable deduction, which is 50 percent of your adjusted gross income for the 2013 tax year.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.