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Charitable Donation Reporting Abuse on US Tax Returns Hard to Solve
Washington, D.C.,
http://www.webcpa.com, June 16, 2009
A new report from the Government Accountability Office blames misreporting
of charitable donation deductions on federal tax returns as a major factor
behind the tax gap, but said that requiring more information reporting might
not improve compliance.
The
report noted that in tax year 2001, an estimated 46 percent of
American taxpayers who deducted cash contributions misreported the
donations, resulting in an estimated $13.8 billion in underreported net
income. Since this amount is in income, and not tax dollars, however, the
tax gap from the misreported cash contributions was much less than $13.8
billion. About 79 percent of misreporting taxpayers overstated a total of
$16 billion in contributions while about 21 percent of misreporting
taxpayers understated a total of $2.2 billion in contributions. A possible
solution could be a requirement for more information reporting on charitable
donations, but the GAO has its doubts whether that will be effective.
“One approach that generally tends to lead to high levels of taxpayer
compliance is information reporting, through which third parties, such as
employers or banks, file returns with [the] IRS and taxpayers that provide
information on a variety of taxpayer transactions,” wrote Michael Brostek,
director of tax issues at the GAO, in a letter to the leaders of the Senate
Finance Committee, who had requested the report. “[The] IRS tries to match
information from information returns filed by third parties against
taxpayers’ income tax returns to see if taxpayers have filed returns and
reported all their income. Currently, information reporting is not required
for cash contributions to charities.”
The GAO acknowledged that requiring information reporting for charitable
cash contributions might not be an effective way to improve compliance.
Charities could incur substantial costs and burdens if they were required to
file information returns with the IRS and taxpayers on the cash
contributions they receive.
Exempting some cash contributions, such as those below a certain dollar
amount or those made to small or religious charities, from information
reporting could reduce the burden on some charities, the GAO noted. However,
exempting some cash contributions from information reporting would reduce
the effect that the reporting would have on improving compliance, in part
because the IRS might not be able to match information returns against tax
returns without complete information reporting.
In addition, the extent to which information reporting would improve
voluntary compliance is unclear. Since a tax year 2001 study by the IRS’s
National Research Program, more stringent requirements for the documentation
taxpayers must keep to substantiate their cash contributions have gone into
effect. It is not yet known whether the requirements have improved
taxpayer-reporting compliance, although an ongoing NRP study of individual
taxpayers could show this, the GAO noted.
The IRS attempts to ensure charitable cash contribution reporting compliance
through enforcement and taxpayer service efforts, said the GAO. Cash
contributions are one of the areas the IRS examines most frequently for
individual taxpayers. For fiscal year 2008, the IRS examined about 175,000
taxpayers who potentially misreported cash contributions, out of about 1.4
million individual taxpayers it examined that fiscal year, and adjusted cash
contribution amounts by $593 million in net terms. Through its taxpayer
service programs, the IRS also provides publications and instructions to tax
forms to help taxpayers comply with cash contribution reporting and
recordkeeping requirements.
The GAO made no recommendations in its report, but the IRS agreed with its
overall conclusion that requiring information reporting for charitable cash
contributions may not be an effective way to improve compliance.
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