I have been thinking
about a recent IRS notice of proposed rulemaking. The IRS is proposing rules
under its own power, arguing that it has the authority to do so under existing
law.
This one has
to do with charitable contributions.
You already
know that one should retain records to back up a tax return, especially for
deductions. For most of us that translates into keeping receipts and related
cancelled checks.
Contributions
are different, however.
In 1993 Congress
passed Code section 170(f)(8) requiring you to obtain a letter (termed
“contemporaneous written acknowledgement”) from the charity to document any
donation over $250. If you do not have a
letter the IRS will disallow your deduction upon examination.
Congress
felt that charitable contributions were being abused. How? Here is an example:
you make a $5,000 donation to the University of Kentucky and in turn receive
season tickets – probably to football, as the basketball tickets are near
impossible to get. People were deducting $5,000, when the correct deduction
would have been $5,000 less the value of those season tickets. Being unhappy to
not receive 100 percent of your income, Congress blamed the “tax gap” and
instituted yet more rules and requirements.
So begins our
climb on the ladder to inanity.
Soon enough
taxpayers were losing their charitable deductions because they failed to obtain
a letter or failed to receive one timely. There were even cases where all
parties knew that donations had been made, but the charity failed to include
the “magic words” required by the tax Code.
Let’s climb
on.
In October,
2015 the IRS floated a proposal to allow charities to issue Forms 1099s in lieu
of those letters. Mind you, I said “allow.” Charities can continue sending
letters and disregard this proposal.
If the
charity does issue, then it must also forward a copy of the 1099s to the IRS.
This has the benefit of sidestepping the donor’s need to get a timely letter
from the charity containing the magic words.
Continue
climbing: for the time-being charities have to disregard the proposal, as the
IRS has not designed a Form 1099 even if the charity were interested. Let’s be fair: it is only a proposal. The IRS
wanted feedback from the real world before it went down this path.
Next rung: why
would you give your social security number to a charity – for any reason? The
Office of Personnel Management could not safeguard more than 20 million records
from a data hack, but the IRS wants us to believe that the local High School
Boosters Club will?
Almost there:
the proposal is limited to deductible contributions, meaning that its
application is restricted to Section 501(c)(3) organizations. Only (c)(3)s can
receive deductible contributions.
But there is
another Section 501 organization that has been in the news for several years –
the 501(c)(4). This is the one that introduced us to Lois Lerner, the
resignation of an IRS Commissioner, the lost e-mails and so on. A significant
difference between a (c)(3) and a (c)(4) is the list of donors. A (c)(3)
requires disclosure of donors who meet a threshold. A (c)(4) requires no
disclosure of donors.
You can
guess how much credibility the IRS has when it says that it has no intention of
making the 1099 proposal mandatory for (c)(3)s - or eventually extending it to also
include (c)(4)s.
We finally
reached the top of the ladder. What started as a way to deal with a problem
(one cannot deduct those UK season tickets) morphed into bad tax law (no magic
beans means no deduction) and is now well on its way to becoming another
government-facilitated opportunity for identity theft.
The IRS
Notice concludes with the following:
Given the effectiveness and minimal burden of the CWA
process, it is expected that donee reporting will be used in an extremely low
percentage of cases.”
Seems a safe
bet.
UPDATE: After the writing of this post, the IRS announced that it was withdrawing these proposed Regulations. The agency noted that it had received approximately 38,000 comments, the majority of which strongly opposed the rules. Hey, sometimes the system works.
