TAXPAYER SAVES $5,000 BY NOT GETTING AN APPRAISAL BUT IT COST HIM $2 MILLION IN TAX

When it comes to large charitable gifts the IRS and the courts are very strict on following the law. As the following couple found out, even if they should undervalue the gift; therefore, cheating themselves of a tax deduction ($4 million), they could lose big time by not paying attention to the rules. The penalty for not properly documenting donations properly is, in most cases, a complete disallowance of the deduction.

The most recent Tax Court case shows the folly of a “sophisticated” taxpayer not following the rules costing them a charitable deduction in excess of $4 million.

Here is a summary of the facts. The taxpayer owned several pieces of property located in the Sacramento, CA area. In 2003, the taxpayers created a charitable remainder trust and donated the property to the trust. In preparing their income tax return, the taxpayer did not get a qualified appraisal for the property. The IRS audited the return and disallowed the charitable donation claimed. The Tax Court just ruled that the IRS was correct.

The interesting part of this case is that the IRS really did not have an argument with the valuation done by the taxpayer. As a matter of fact, they basically conceded that the value was most likely higher than what the taxpayer claimed. However, the taxpayer filled out the form, did not read the instructions and had his entire donation amount disallowed. A qualified appraisal would have probably cost the taxpayer about $5-10,000. This would have allowed the donation and probably saved the taxpayer easily $2 million or more in taxes.