Recognizing that donations to charity benefit society as a whole, the IRS allows taxpayers to deduct contributions to qualifying nonprofit organizations. It sounds counterintuitive, but doing good can also increase your chances of being audited, especially if a donation seems unusual.

Qualified Organizations

For tax purposes, charitable contributions must be made to qualifying organizations. Even if made to a qualifying organization, donations cannot be earmarked to a specific individual.

The IRS maintains a list of qualifying organizations on its website. Religious organizations and registered nonprofits are both generally considered qualifying organizations, as are local, state, and federal governments, including their departments.

Chamber of Commerce groups, country clubs, and homeowners' associations, in comparison, aren't generally considered qualifying organizations. Before claiming a contribution, taxpayers should verify that the organization qualifies.

Donation Compared to Income

When a charitable contribution is a significant portion of a taxpayer's AGI or higher than the averages for their tax bracket, the IRS is more likely to flag a return.

In 2020, for example, taxpayers who made between $100,000 and $500,000 donated an average of $9,472, or 4.7 percent of their AGI. A taxpayer with an AGI of $120,000 makes a donation of $30,000, which is 25 percent of their AGI and five times more than the average amount. It's perhaps not surprising that that amount would attract attention.

Also worth noting is that the IRS caps charitable deductions to 60 percent of a taxpayer's AGI. It can be capped as low as 20 percent in certain situations.

Especially when a significant percentage of a taxpayer's annual income is donated to a charity, they should make sure to have records showing their donation. Even for smaller amounts, taxpayers should keep records of all charitable donations, ideally in the form of a receipt from the organization. Some organizations may also send an annual summary of contributions.

Noncash Donations

Noncash donations are another common basis for an audit. This is partially because of the difficulty in determining the value, as well as a tendency to overestimate a noncash item's actual value.

Individuals can donate property, cars, and other items to charity. For tax purposes, one of the difficulties with noncash donations is determining an item's actual value. Taxpayers should use neutral sources to help determine the cash value of noncash donations.

The IRS recommends considering factors and characteristics such as an item or property's desirability, use, condition, scarcity, market demand, and other relevant information. For example, if a taxpayer donates a car to a charity, they could use the Kelly Blue Book to determine the car's value. Others may choose to contact a dealership to get a valuation of their specific car. Cars that are collector's items, in comparison, may be more difficult to value.

Taxpayers should avoid arbitrarily assigning a value or basing a value on their personal opinion. They should document all contributions as well as other relevant information that shows their charitable contributions meet IRS requirements.

If you have questions about how charitable contributions affect your taxable income, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.