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Letice Morgan
ID: L30125696
Discussion Thread: Reply Week 7
Oct 5, 2023
Discussion Post 4, Question #4: Proper Supporting Documentation for Tax
Returns
Mary Schultz-Rathbun
School of Business, Liberty University
ACCT 401: Individual Taxation
Instructor Jay Wright
October 5, 2023
In this scenario, a tax professional must determine the appropriate course
of action when a longtime client fails to bring in the necessary
documentation to substantiate a “significant” charitable donation. Should
the tax preparer release the client’s tax return without specific proof of
the donation? At first glance, the AICPA’s Statements on Standards for Tax
Services (SSTS) would suggest that releasing the tax form despite
documentation would be appropriate. SSTS No. 3 states that a tax
preparer “may rely without verification on information that a taxpayer or
a third party has provided, unless the information appears to be incorrect,
incomplete, or inconsistent” (Spilker, et al., 2024). Without
documentation for this large donation however, the information is
arguably "incomplete."
In some instances, tax professionals are allowed to use estimates in
preparing clients’ tax returns, based in part on the “Cohan Rule.” This rule
stems from a 1930 appeals court ruling which, overruling lower courts,
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permitted the partial deduction of certain business expenses despite the
fact that the expense amounts were not properly documented (Cook and
Webber, 2021). However, the Cohan Rule cannot be applied in this
particular situation for multiple reasons. First, Cook and Webber (2021)
make it clear “that the IRS is under no obligation . . . to accept a
taxpayer’s estimate – under Cohen.” Secondly, as the same authors point
out, before invoking the Cohan Rule, a taxpayer must first prove that
there was an expenditure to begin with. The burden of proof falls on the
taxpayer. Further, these authors emphasize that Cohan is not a free pass
for poor record-keeping, but rather a guideline that encourages tax courts
to consider allowing reasonable expense deductions in certain instances
where the exact amount of the expense (but not the existence thereof) is
in doubt. It is important to note that in general when the Cohan Rule is
called into play, it will result in a partial but not a full deduction of the
estimated expense amount.
Finally, and most critically, the Cohan Rule generally applies principally to
business expense deductions, and it does not apply to situations where
the IRS has given specific guidelines for substantiation, such as for
charitable donation deductions. The IRS has fairly stringent requirements
for the allowance of charitable deductions. All charitable deductions
require some form of documentation. For any deduction of more than
$250, the IRS (2023) requires written documentation from a qualified
charity in the form of a CWA. Failure to meet this requirement results in
automatic disallowance of the deduction. If the value of the donation is
over $5,000, the taxpayer must also have an appraisal from a qualified
appraiser (Internal Revenue Service, 2023). High value charitable
deductions may increase the likelihood of selection for audit by the IRS
DIF system (Spilker, et al., 2024). In the case of an audit, the client must
be prepared with the proper documentation in order to avoid assessment
of additional tax and penalties. If the taxpayer has lost the documentation
(or failed to obtain it in the first place), it is likely better for the client to
forgo the deduction than face the risk of tax penalties.
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Ultimately, the client is responsible for providing their tax preparer with
complete and accurate information, while the tax professional is
responsible for verifying that information to the best of his or her ability.
The SSTS repeatedly use the word “reasonable” in describing the tax
professional’s level of responsibility (Spilker, et al., 2023). In this
scenario, the tax professional may feel confident, given their long history
with the client, that the client is being truthful about the donation and
does in fact have the appropriate documentation. Based on SSTS No. 3,
the tax professional might release the return after a clear discussion with
the client about the IRS’ documentation requirements for charitable
donations and the potential consequences in case of an audit,
emphasizing that the client bears the ultimate responsibility for providing
documentation and paying any potential fines or additional tax. However,
given that the tax professional must sign off on the accuracy of the return,
the wiser course of action would be to hold the return until the tax
preparer can confirm that the proper documentation exists.
References
Cook, J. K., & Webber, S. (2021). "Cohan Rule" Estimates: Certified Public
Accountant.The CPA Journal, 91(10), 50-54.
https://go.openathens.net/redirector/liberty.edu?url=https://www.proques
t.com/scholarly-journals/cohan-rule-estimates/docview/2600355250/se-2.
Internal Revenue Service. (2023).Publication 526: Charitable
Contributions (Cat. No. 15050A). https://www.irs.gov/pub/irs-pdf/p526.pdf.
Spilker, B.C. (Ed.), Ayers, B.C., Lewis, T.K., Weaver, C.D., Barrick, J.A.,
Robinson, J.R., Worsham, R.G.. (2024).Taxation of Individuals and
Business Entities(15th ed.). McGraw-Hill.
Read Less
Reply
Good morning Mary,
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Thank you for your discussion thread on the scenario Proper Supporting Documentation for
Tax Returns. A tax professional must determine the appropriate course of action when a
longtime client fails to bring in the necessary documentation to substantiate a “significant”
charitable donation. Should the tax preparer release the client’s tax return without specific
proof of the donation? The person has been a long-time client with the tax preparer, and I am
sure they have built a rapport over the years and there are some things the tax preparer knows,
but may not necessarily be able to substantiate legally through conversation. For example, I
know one of my clients had a baby in June of this year. While this may be known to all friends
and associates, but for tax reporting purposes, we would still need a birth certificate.
The IRS has specific guidelines on how charitable contributions are to be documented.
IRS Publication 1771, Charitable Contributions–Substantiation and Disclosure Requirements,
explains the federal tax law for organizations, such as charities and churches, that receive tax-
deductible charitable contributions and for taxpayers who make contributions. The IRS imposes
recordkeeping and substantiation rules on donors of charitable contributions and disclosure
rules on charities that receive certain quid pro quo contributions. Donors must have a bank
record or written communication from a charity for any monetary contribution before the
donors can claim a charitable contribution on their federal income tax returns. Donors are
responsible for obtaining a written acknowledgment from a charity for any single contribution
of $250 or more before the donors can claim a charitable contribution on their federal income
tax returns. Charitable organizations are required to provide a written disclosure to a donor
who receives goods or services in exchange for a single payment in excess of $75. (Charitable
Contributions Substantiation and Disclosure Requirements. 2023. https://www.irs.gov/pub/irs-
pdf/p1771.pdf)
As a tax professional, it is important for her to adhere to ethical standards and comply with
applicable laws and regulations. In this situation, it is important to verify the accuracy of the
client's tax return and ensure that all necessary documentation has been provided before
releasing the return. The client's assurance that the documentation will be provided is not
adequate to explain releasing the return without the necessary documentation. This covers the
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preparer and the taxpayer if there should be an audit and it will set clear business and ethical
boundaries with the client in the future. The bible says in Luke 12:2 New King James Version,
“For there is nothing covered that will not be revealed, nor hidden that will not be known.” We
as financial and accounting professionals have to adhere to ethics and standards, but most of all
we have to adhere to God.
Thank you for your discussion on this topic. I actually learned a lot when I went back and
read the IRS publication on this matter.
References
Charitable Contributions Substantiation and Disclosure Requirements. 2023.
https://www.irs.gov/pub/irs-pdf/p1771.pdf
Luke 12:2 KJV. (2023). https://www.biblegateway.com/
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