Taxpayers Guide to LLCs and S Corps
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Does deducting charitable contributions cause an audit?
Perhaps. No one can say for sure, but there are donation ratios and averages that the IRS can use to determine if you are an outlier. In addition, the reporting requirements on your tax returns are changing every so often giving the IRS more detail of your contributions. This in turn facilitates certain triggers.
Recently the IRS has increased its requests for documentation in lieu of full audit or examination. We have seen several letters being received during the summer that ask for receipts and other proofs of payment for medical expenses, tuition and charitable contributions. The IRS is saying Hey, your tax return is not being examined per se but we are auditing your donation amounts.. just send us your stuff.. please (no, they don’t really say please- in fact they use that awful font and letter formatting that appears menacing and they mail it in time to arrive right around 5:30PM on a Friday, preferably with the following Monday being a legal holiday).
If you cannot prove your deduction, your tax returns will be adjusted with penalty and interest.
What precisely triggers these ‘audit’ letters is unknown, but it is an efficient way for the IRS to crackdown on erroneous deductions. Make sure the amount that you deduct is defensible. We also expect the expansion of these letters to other areas on your tax returns besides medical, tuition and donations.