While the Internal Revenue Service promotes charitable giving with a tax deduction, it also knows that people may accidentally or intentionally falsify their giving records to lower their taxes. However, as long as you give to a legitimate charity, you should not fear raising a red flag from the IRS. If you still feel a little paranoid about giving too much, you could claim a lower deduction to fall in line with average giving rates.
There is no set dollar amount you can give to a charity and deduct on your taxes without raising a red flag on IRS computers. The IRS uses a formula called Discriminant Function System to identify potentially fraudulent or erroneous tax deductions. Your DIF score depends in part on the giving rate of people in a comparable financial position. The average giving rate, for instance, is 2 percent, so it may raise a red flag if you earned $10,000 and gave away half of it, according to Andrea Coombes of Market Watch.
As long as you report a charitable donation honestly and have an accurate return in all other areas, you should have nothing to fear. Omitting a charitable deduction means you pay extra money to the government that you could keep for yourself. On the other hand, it may be worth the reduced audit risk to forgo deducting a small contribution. For instance, a charitable donation of $100 would only net $35 if you were in the top tax bracket in 2011. However, because the IRS goes by your DIF score when calculating your audit risk, you should use the charitable donation's proportion to your income to determine whether you should take the deduction.
Some deductions are more prone to a red flags than others. In general, cash gifts tend to raise less suspicion, because the IRS can cross-reference any receipt you provide with your return. Non-cash gifts, such as cars and property, are more likely to call for an audit, because they do not have a straightforward value. For instance, if you donate a car, you must use the value for which it sells at auction or receive an appraisal.
If you make any deduction, have some documentation to go with it, such as a credit card statement. If you donate more than $250 to any charity, you must get a disclosure notice that states the value of the donation and the name of the charity. Also, a professional tax preparer can compare your charitable donation to others in your area to determine if the donation might give your return a high DIF score.
- IRS: Publication 526, Charitable Contributions
- Market Watch: IRS Audit Triggers and Red Flags -- The 2010 Tax Guide from MarketWatch; Andrea Coombes; April 2009
- CNN Money; Hot Tips: Avoid The IRS Hot Seat; Catherine Clifford; March 2008
- The Motley Fool; Top 5 Audit Myths; Roy Lewis; March 2006
- "Kiplinger"; IRS Audit Red Flags: The Dirty Dozen; Joy Taylor; December 2010
- Internal Revenue Service. "Charitable Organizations - Substantiation and Disclosure Requirements." Accessed Mar. 21, 2020.
- Internal Revenue Service. "Know these Facts Before Deducting a Charitable Donation." Accessed Mar. 21, 2020.
- Internal Revenue Service. "Charitable Contribution Deductions." Accessed Mar. 21, 2020.
Russell Huebsch has written freelance articles covering a range of topics from basketball to politics in print and online publications. He graduated from Baylor University in 2009 with a Bachelor of Arts degree in political science.