I would like to acknowledge my colleague, Attorney Patricia Weisgerber, LL.M., who co-authored this blog article with me.
If you are a donor who makes a charitable gift of $250 or more, you need to obtain a “contemporaneous written acknowledgment” (CWA) letter from the recipient charitable organization to substantiate your donation and take the charitable deduction on your income tax return. These letters must describe the amount of the donation as well as other information, but they are also a way for the charity to express their sincere gratitude. Although the CWA requirement is very strict, the process has, for the most part, worked effectively for about twenty years.
Also, included at the same time in the substantiation statute was an exception to the CWA requirement. This exception stated that a CWA would not be required if the donee (charitable) organization files a return using a form prescribed by the IRS. Regulations for this exception were never issued, so the exception has never been implemented.
Proposed Regulations to the Charitable Deduction Substantiation Requirements
However, back in September, the IRS issued proposed final regulations to create a process for the donee reporting exception. It is a voluntary process, so if the regulations are issued, charitable organizations will decide whether they want to use the donee reporting process or continue following the same CWA procedure. This will create two parallel reporting processes.
If donee organizations do choose to use the proposed reporting process, there are certain pieces of information that will be required. Similar to the current CWA process, the donee organization will need to report:
- The amount of cash and a description of any property other than cash contributed;
- Whether any goods and services were provided by the donee organization in consideration for the contribution; and
- A description and good faith estimate of the value of any goods and services provided by the donee organization or a statement that such goods and services consist solely of intangible religious benefits.
Importantly, the proposed regulations will also require the following:
- The donor’s name;
- The donor’s address; and
- The donor’s taxpayer identification number.
Our Concerns: Data Security and Identity Theft
We are uneasy about how both donors and donees could be impacted by these proposed regulations, even if the proposed donee reporting process is voluntary. One primary concern is the protection of taxpayers’ confidential information. The current CWA process does not require donee organizations to collect taxpayer information; in particular, a donor is not required to provide their social security number when they make a gift to a charity.
Collection of such information in the reporting process also requires storage and transmittal. In a year when IRS data storage systems themselves were breached, this requirement seems counterintuitive. In fact, another chief concern is that such a requirement would make charitable organizations the target of hackers and organized crime. We also see the potential for telephone scammers to use such a regulation requirement to create new schemes to fraudulently obtain social security numbers, particularly from the elderly. Additionally, having parallel processes for substantiation may lead to confusion and error, especially for donors making charitable gifts to multiple organizations. Such errors could then lead to unwanted audits and disallowance of charitable deductions.
One final concern is anticipatory: we question whether once the IRS expends funds and resources on implementing this voluntary process that it may convert it to a mandatory process at some later point. There is nothing in the proposed regulations that alludes to such a change; we are just trying to be protective of our clients.
Lack of Discernible Benefits
Additionally, we cannot determine an outright benefit to such a reporting process. Such a reporting process would require that additional costs be borne by charitable organizations that already operate under very lean budgets. This means funds will be allocated away from a charity’s mission to administration expenses. The requirement that social security numbers be obtained may also affect overall contributions to a charity by discouraging donors from making a gift to charity over $250.
Meanwhile, sophisticated donors making large gifts whether of a cash or non-cash nature may find it much more difficult to make an anonymous gift since, in addition to social security numbers, the name(s) and address of the donors would be required. Under the current CWA substantiation process, tax counsel such as ourselves, may act as agent for such donors or assist in managing anonymity in other ways. This may drive donors away from making gifts directly to a charity and, instead, employing mechanisms like a donor-advised fund (DAF) to maintain anonymity. While this is a viable option, there are other considerations such as cost, building a trusting relationship with the DAF sponsor and the length of time it may take to make the gift depending on the DAF’s grant recommendation process.
Robinson & Company’s Comment Letter to the IRS
When the IRS issued its proposed regulations regarding the substitute donee reporting process, it provided the opportunity for taxpayers to provide comments by December 16, 2015. Because of our above concerns, M. Robinson & Company felt compelled to submit a comment letter to the IRS with our clients’ best interests in mind.
In our comment letter, we communicated our concerns about the proposed donee reporting process, particularly in light of the current CWA process which we find to be an effective and easy compliance procedure for both donees and donors. We often work on complex returns involving charitable deduction contributions which often necessitate tax modeling, spreadsheets for carryover amounts and documentation of qualified appraisals; another reporting requirement which muddies the water is of no benefit to anyone.
As a result, we have opposed the proposed regulations creating a donee reporting process as a substitute for the current CWA process. Along with others, we have suggested that this exception is unnecessary and should be removed from the tax code to prevent this issue from arising again in the future. If you would like to view our comment letter, please go to www.regulations.gov and search (by organization) under M. Robinson & Company, P.C. or contact us for a copy of our letter.
If you have questions or need assistance with regard to tax planning or modeling for charitable contributions or creating a philanthropic legacy, the attorneys at M. Robinson & Company may be able to assist you. Please feel free to contact us at 617-428-6900.
End of article
 IRC Section 170(f)(8)(A).
 See “Contributions of Art: Elements of a “Boring” Charitable Contribution Deduction” by Morris N. Robinson, Esq., CPA, LL.M dated October 22, 2015.