Hundreds of thousands of taxpayers may be overestimating the value of noncash donations to charitable organizations, and wrongly receiving a tax refund based on that overestimate, but the Internal Revenue Service isn’t sure because it hasn’t been enforcing reporting requirements.
A new report from the Treasury Department found over $1 billion in problematic tax refunds in 2010 alone. “Taxpayers can generally deduct noncash charitable contributions made to qualifying organizations during the tax year on their Federal tax returns,” J. Russell George, Treasury Inspector General for Tax Administration said in a statement. “However, taxpayers who do not comply with the reporting requirements for noncash contributions could be incorrectly reducing their tax liabilities and receiving tax refunds to which they are not entitled.”
TIGTA conducted the study due to “taxpayers deducting amounts for noncash contributions that did not reflect the fair market value of the donation as required by the tax laws,” the report says. “As a result, taxpayers were benefiting from the deductions more than charities were benefiting from the donations.”
The inspector general estimated that, in 2010, 60 percent of people (273,000) who claimed large tax deductions for noncash contributions — such as cars or paintings — overestimated the value of those gifts by combined $3.8 billion, resulting in $1.1. billion in erroneous tax refunds.
“However, the IRS’s actions have not been effective at identifying the majority of unsubstantiated noncash charitable contributions by taxpayers during returns processing,” the report says, noting that the IRS does not always follow its internal protocols for reviewing these tax returns. “None of the tax returns in our samples had been examined.”
The IRS disagrees with TIGTA’s assessment of the problem. “We believe the figure they cite is potentially misleading as an unsubstantiated expense does not automatically equate to an unallowable expense and subsequent enforcement actions were not taken into account,” IRS spokeswoman Michelle Eldridge said in a statement to The Washington Examiner.”The IRS agrees with TIGTA that some actions can be taken to improve taxpayer compliance with the reporting requirements for noncash charitable contributions, and we continue to make improvements in this area.”