Charitable Donations, Tax Deductions and IRS Audits: What Taxpayers Need to Know in 2021

Charitable donations have long been a tool for U.S. taxpayers to reduce their federal income tax liability. Taxpayers who itemize their deductions rather than taking the standard deduction can reduce their tax liability significantly—or eliminate it entirely in some cases—and charitable donations to qualifying organizations qualify for itemized deductions. But, as Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, taxpayers claiming deductions for charitable donations must be careful in order to avoid unwanted scrutiny from the IRS.

Itemized Deductions for Charitable Donations Can Be Red Flags for the IRS

It is no secret that some taxpayers falsify information about their charitable donations on their income tax returns. From overstating the value of clothing donated to Goodwill to claiming deductions for funds contributed to donor-advised funds, there are a variety of ways that taxpayers attempt to increase their itemized deductions in order to reduce the amount they owe.

Because of this, the IRS pays close attention to claimed charitable deductions in taxpayers’ annual returns.

In particular, the IRS looks for a number of red flags. For example, all of the following are viewed as signs of potential tax evasion through the use of fraudulent itemized deductions:

• Donations made not directly to qualifying charities, but instead to donor-advised funds or supporting organizations
• Donations made to private foundations and trusts
• Claimed donations of volunteer services, clothing and household items
• Claimed donations that significantly exceed the taxpayer’s donations in prior years
• Improper reporting of charitable deductions, or inconsistencies between the taxpayer’s claimed donations and the charitable organization’s reported contributions

In 2020, the IRS suspended the limits on charitable contributions as a form of tax relief related to the COVID-19 pandemic. This allowed taxpayers to claim qualified cash contributions of up to 100 of their adjusted gross income (AGI) for the 2020 tax year. While this suspension was undoubtedly well-intentioned, it is also likely to lead to IRS audits for taxpayers suspected of fraudulently inflating their itemized deductions.

Defending Against an IRS Audit Focused on Fraudulent Itemized Deductions

Whether you are facing scrutiny for claiming unsubstantiated deductions or the IRS is auditing your 2020 tax return because you claimed charitable contributions equal to 100 percent of your AGI, an unfavorable outcome could have severe consequences. IRS audits can lead to substantial liability for back taxes, interest and penalties, and in some cases they can lead to criminal tax fraud investigations. As with all federal tax matters, if you are concerned about potential liability related to your itemized deductions for charitable donations, a proactive approach is best, and you should discuss your situation with a Washington D.C. tax attorney promptly.

Request an Appointment with Washington D.C. Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group

If you need to know more about correcting past tax filing mistakes related to itemized deductions for charitable donations, we encourage you to schedule an appointment at Thorn Law Group. To speak with Managing Partner Kevin E. Thorn in confidence, call 202-349-4033, email ket@thornlawgroup.com or inquire online now.