Keeping good records and attention to detail in your financials and tax documents is the best way to prepare for an audit. It can make a $19 million difference, as was illustrated in May of this year when the Tax Court refused Joseph Mohamed, a California entrepreneur, a charitable contribution deduction because he hadn’t complied with the substantiation requirements of Treas. Reg. §1.170-13.
Essentially, the problem boiled down to the fact that the entrepreneur hadn’t read the directions and had filled out Form 8283 (Noncash Charitable Contributions) incorrectly.
Joseph Mohamed is successful in real estate as a broker and certified appraiser. He is also a philanthropist, donating several significant properties to a variety of charities. In order to claim these donated properties as charitable contributions, he needed to fulfill the regulations for property contributions over $5,000. These regulations require that:
- A qualified appraisal must be made not more than 60 days before the gift and no later than the due date of the return.
- It must be signed by a qualified appraiser, who cannot be the donor or taxpayer claiming the deduction or the recipient of the property.
- Also, the qualified appraisal must contain all the information required by the regulations, including a description of the property, the basis of the property, and the appraised FMV of the property.
In 2005, Mohamed made his first significant real estate contributions. Contributions that, as a certified appraiser himself, he valued at $19 million. The problems started for Mohamed when, at tax time, he appraised the properties himself rather than getting an independent appraisal, failed to sign the Declaration of Appraiser, and failed to attach all the substantiation paperwork that was required.
The IRS noted the problems with the form and audited him, saying that he could not claim any of his charitable donations. In spite of the fact that Mohamed obtained an independent appraisal that showed the value of the properties actually exceeded what he’d claimed, the IRS pressed on. They said that since Mohamed had failed to provide all the substantiation paperwork, none of his contribution claims were valid. Mohamed spent the next few years fighting back, but to no avail.
Although the Tax Court acknowledged that Mohamed had indeed made a deduction of eligible properties to qualified organizations and that their ruling was harsh, it rejected all of Mohamed’s charitable contributions on the basis of Mohamed’s failure to comply with the requirements.
Details are important, especially when dealing with the IRS. It can’t be said enough: keep good records, and be sure you are following regulations and filling out forms precisely.