Some IRS tax audits are fully random. Many other audits are triggered by things taxpayers do or don’t do. One way you can attract IRS attention to yourself is through your charitable activities.
Contributions to Charities
The IRS encourages taxpayers to donate to charities by offering deductions for donations. However, your donations and deduction claims may inadvertently increase your risk for a tax audit. Here are three ways charitable donations attract tax audits.
1. Unusually Huge Donations
Giving away big amounts of cash can turn into a big red flag. The IRS expects your contributions to charities to be around the national average for your income level. Accordingly, they may consider a lifestyle audit if you’re giving away much more than your annual income allows.
2. Donations to Fake Charities
Claiming contributions to a non-existent charity is a common tax scam. Scams will needlessly enhance the chance of being audited. A professional tax accountant in Utah such as those from Sorenson & Company will give you the right advice so your return won’t have items on IRS’s “Dirty Dozen” lists.
3. Overestimating Donated Amounts
It’s up to you to determine the value of goods you donate. However, the IRS expects a valuation of 1 to 30 percent of the original price you paid for the donated item. An appraisal letter can help you prove that you’re valuing donated items at fair prices.
You’re obliged to have all items worth $5,000 or more appraised. You can also use the “willing-buyer-willing-seller test” to get fair estimates of donated items. Value your goods at a price where a seller who is not under any duress may sell the item to a buyer who is also under no duress.
You may attract unwanted attention if you become particularly generous. The IRS may want to check if you inflated your charitable donations. Talk to a tax accountant in Utah before you make a claim deduction of just under or above $500.