The end of the year is a natural time to think of charitable giving. It’s an opportunity to support organizations whose work you care about while making intelligent use of the charitable deduction for tax planning purposes.
The basic rules on tax-deductible contributions have been in place for years. The substantiation requirements for donors and the disclosure requirements for organizations are described in detail in IRS Publication 1771. The standard practice has been for charities to acknowledge donations by letter at the time the gift is given.
This year, however, the IRS has proposed new rules that would involve charitable organizations asking for and keeping track of the Social Security numbers of their donors. In this post, we will update you on this rather problematic proposal.
The rules that the IRS has proposed would not do away with the traditional way of acknowledging gifts to charities. But the new rules would allow for an alternative way of acknowledging a gift so that the donor could claim the charitable deduction.
Under this alternative method, a charity could voluntarily file an informational return to acknowledge (or, in more formal terms, “substantiate”) gifts of $250 or more. This informational return or form would be sent to both the donor and the IRS. Along with information about the gift, it would include the Social Security number of the giver.
The proposed rule has generated thousands of comments, many of them negative. One major concern is the use of Social Security numbers (SSNs). Given the widespread problem of identity theft linked to stolen or misappropriated SSNs, it is easy to understand that concern.
Another concern is the potential confusion it could create to introduce a parallel substantiation structure for charitable gifts. As a result, the National Council of Nonprofits is dead-set against the proposed new rule.
The genesis of the proposal appears to have been the awkwardness involved in audits of substantial donors who don’t actually have receipts for their gifts. Some of these donors have taken the position that a receipt is not required for taking a charitable deduction as long as the charity itself files an appropriate return.
But even the Treasury Department, in its proposal for the new rule, concedes that the current system of verifying gifts works well overall.