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Although tax considerations are not the primary reason why most Californians donate to charity, the charitable deduction is heavily relied on by some individuals and businesses to plan how to dispose of unwanted property. Many Orange County taxpayers are dismayed when their charitable deductions are disallowed by the IRS due to a lack of documentation. The frequency of these disallowances makes it important for California taxpayers to remember to “get the letter.”

The tax rules require that taxpayers present a letter to substantiate gifts over $250 in order to qualify for the charitable deduction. One tax advisor said that she saw a six-figure deduction disallowed because the taxpayer failed to secure a letter from the university to which the charitable gift was made.

“If you don’t have the correct paperwork, there’s no way to fix the problem,” the tax advisor said.

“The letter” that taxpayers should obtain must detail the amount of the charitable contribution and also state that no goods and services were exchanged for the gift. If the taxpayer did receive something in exchange for the charitable contribution then the letter should say what was given to the tax payer and detail the worth of the goods or services provided to the taxpayer.

This letter must be in the possession of the taxpayer by the return date if the charitable contribution is over $250. Typically a receipt or canceled check is sufficient for contributions under $250 but more documentation may help protect taxpayers in the event of an audit.

Before making a large charitable contribution it is wise to consult with an experienced Orange County tax attorney. The IRS is very strict about the rules surrounding charitable deductions and a mishap can be very costly for the gift donor.

“It’s surprising the IRS is taking such a literal approach to the law,” a tax expert told the Wall Street Journal. “An established tax doctrine favors substance over form, but here they aren’t willing to bend at all.”

Source: The Wall Street Journal, “One Easy Way to Lose That Charitable Deduction,” Laura Saunders, 6/11/11