IRS Tells Couple Tithes to Church Not Tax Deductible
No one ever gives to their church thinking they will experience trouble with the IRS. Yet, this is what happened to a Texas couple (David and Verona Durden) that gave $25,171.00 to their church in tithes and offerings.
The IRS acknowledged that David and Verona gave the $25,171.00, but denied them a deduction because the contribution statement was not in compliance with section 170(f)(8)(A) of the tax code. After denying the contribution, the IRS sent the couple a deficiency notice of $7,552.00 plus a penalty of $1,510.40 for failing to file an accurate tax return.
When David and Verona received the bill from the IRS, they went to their church and asked for a 2nd receipt that they could present to the IRS. The church complied and drafted a new receipt in the hopes that the IRS would relent and allow them their tax deduction.
However, the IRS did not accept it because according to the tax code (section 170(f)(8)(C) and Treasury Regulation 1.170A-13(f)(3)) all giving receipts must be issued before individual tax returns are filed.
What we don't know can actually hurt
Not having any other recourse, David and Verona went to court and filed a petition in the U.S. Tax court to have the IRS tax assessment overturned. The tax court ruled in favor of the IRS stating that the plain language of the code says that "No deduction shall be allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution . . ." with a receipt that meets the requirements of the law (Durden vs. Commissioner).
No deduction shall be allowed for any donation of $250 or more unless the taxpayer substantiates the contribution.
At all of our conferences, we teach pastors and church leaders about the "$250 rule" and other requirements pertaining to donor giving receipts.
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What the law requires
This case focuses on donations (tithes and offerings) of $250.00 or more. The law requires a church to treat them with special care. As the tax court pointed out, IRS code sections 170 (f)(8)(A), (B) and (C) require that a special receipt be given to the taxpayer that contains four pieces of information, as stated below:
- The receipt has to state the amount of the contribution.
- The receipt must give a description of anything the church/ministry gave in return for the donation. For example, many organizations use marketing campaigns to encourage people to make donations. They may say, "If you make a donation of $500.00, we will send you a special book signed by the author."
- The receipt must state the value of what the taxpayer received in return and;
- The taxpayer must have the receipt in his/her hands on or before filing his/her tax return or by the due date of his/her tax return, including extensions.
(Recommended reading: "7 Things You Need to Know About Donor Giving Receipts")
A solution to your recordkeeping dilemma
The IRS chose to rely on the technical details of the law in order to deny a tax deduction. It also acknowledged that the couple made the contributions to a church that was a qualified charity, but made it clear that its position was to make sure that the taxpayer complied with all of the requirements of the law. The church's failure to give them an IRS compliant receipt cost them an extra $9,062.40 on their tax return.
(Recommended reading: "Restricted Offering vs. Designated Offering")
I cannot stress enough how important it is for the church to not just keep good records but to also understand the laws that govern church and ministry management. Errors such as the one in this case can cause people to lose faith in their church's ability to look out for the best interest of the members. Moreover, because we are living in the most litigious society in the history of the earth, it is only a matter of time before someone tries to sue their church if the IRS denies them a deduction because their receipt was noncompliant.
Our Bookkeeping Service provides you with the necessary tools to assist you in keeping track of your church’s finances and giving statements. Through our Bookkeeping Service, you will have your own personal bookkeeper, monthly reports, a subscription to Kingdom Steward, and a CPA to complete your compilation documents.
If you have questions regarding your church’s finances, call our office today at 877-494-4655. One of our knowledgeable staff members will be happy to answer your questions.
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