14 Feb Donations and avoiding an IRS audit
Q. I want to give away my china and crystal. The pieces sell for a high price on the reseller websites, but those same sites offer to buy the pieces for maybe a quarter of that price. If I donate, do I have to get an appraisal? Or can I just use the seller prices on the website as proof of value for the IRS?
A. Giving your stuff away can be a satisfying experience, especially when you can receive a substantial tax write-off.
But you do have to be careful to stay within IRS rules.
The general rule for noncash charitable contributions is that you must file Form 8283 “Noncash Charitable Contributions” if the value of the total donation exceeds $500, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
Additionally, he said, if the total donated property exceeds $5,000 — except publicly-traded securities — an appraisal is generally required.
Your question really has to do with the definition of “fair market value.”
Kiely said the IRS defines “fair market value” as the price a knowledgeable buyer would pay a willing and knowledgeable seller when neither has to buy or sell.
Kiely thought a look at the TV show “Pawn Stars” would help to make this clearer.
“Rick, the owner of the pawn shop, will call in an appraiser to look at something a potential seller brought in,” Kiely said. “The appraiser may say it is worth $5,000. After the appraiser leaves Rick might offer $2,500 for the item.”
That’s because Rick is in business to make a profit.
“If he gave the seller $5,000 and the item kicked around the shop for a year and finally Rick sells it for $5,000, Rick make no profit,” Kiely said. “How does he stay in business?”
The websites you refer to are like Rick’s pawn shop and they are in a business to make a profit, Kiely said.
Kiely said an appraisal will discuss the condition of the item, and they’re supposed to be professional and objective.
“If you donate the property without an appraisal and the IRS questions you about it, you will lose the deduction because if you no longer have the property, how can an appraiser appraise it?” Kiely said.
If you have photos of the items, that’s something you can present in an audit, but it’s not as good as an appraisal, which the IRS says is “generally” required.
So will not having an appraisal be an audit red flag?
“Being audited usually depends on how much bad Karma you have,” Kiely said. “A middle income return with a large non-cash contribution increases your odds of getting noticed by the IRS.”
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This post was first published in February 2017.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.