On 10/5/23, the IRS issued a warning and offered tips to all taxpayers, including, High-Net-Worth taxpayers (high income filers) to be on the lookout for promotions that promise art donation deductions that are a tax scheme. Although there are legitimate ways that taxpayers can claim donations of art, there are unscrupulous promoters may use direct solicitation to promise values of art that are too good to be true. As per the IRS warning, “these promoters persuade taxpayers, usually high-income taxpayers, to purchase the art, wait to donate the art and then take an incorrect deduction for the art donated”. Given the uprise in this tax scam, the IRS has initiated active promoter investigations, taxpayer tax return audits underway and civil penalty investigations in this area.
IRS Reminder to all taxpayers to be aware of art donation schemes
All taxpayers ought to keep in mind that the IRS is focused on increasing compliance efforts on high-income and high-wealth individuals to ensure filers pay the right amount of tax owed. On 3/31/23, the IRS continued the release of its 2023 annual “Dirty Dozen” List – this time geared towards high income filers by presenting abusive arrangements. “The IRS remains concerned about abusive tax arrangements, and they remain a focal point for our enforcement efforts,” said IRS Commissioner Danny Werfel. “Taxpayers should beware of potentially abusive arrangements and promoters pushing them. People should seek out trusted, reputable tax advice and not be fooled by aggressive advertising and sales pitches.” The Dirty Dozen campaign is a list of 12 scams and schemes that put taxpayers and the tax professional community at risk of losing money, personal information, data and more. The IRS reminds all taxpayers that they are legally responsible for what is on their tax return, not only the practitioner or promoter who entices them to sign on to an abusive transaction.
Art donation scheme deduction promotions
“Creativity in art is a beautiful thing, but aggressive creativity in art donation deductions can paint a bad picture for people pulled into these schemes,” said IRS Commissioner Danny Werfel. “This is another example where people should be careful when it comes to aggressive marketing and promotions. There are legitimate ways to claim an art donation, but taxpayers should be careful to understand the rules and watch out for inflated values or questionable appraisals. Beauty is not always in the eye of the beholder when it comes to tax deductions of art.”
The IRS warning states that questionable art donations by taxpayers have been – and will continue to be — under audit when questions arise. These donations can involve art valued at millions of dollars. More than 60 taxpayer audits have been completed with more in the works; those audits that have produced more than $5 million in additional tax.
How the art donation deduction scheme works
“Promoters encourage taxpayers to buy various types of art, often at a “discounted” price. This price may also include additional services from the promoter, such as storage, shipping and arranging the appraisal and donation of the art. The promoter promises the art is worth significantly more than the purchase price.
These schemes are designed to encourage purchasers to donate the art after waiting at least one year and to claim a tax deduction for an inflated fair market value, which is substantially more than they paid for the artwork. Promoters may suggest taxpayers donate art annually and allow them to buy a quantity of art that guarantees a specific deductible amount. Promoters may even arrange for certain charities to take the donations”.
IRS Red flags for art donation deduction schemes
Buying multiple works by the same artist that have little to no market value outside of what the promoter might be advertising.
Specific appraisers for participants to use. An appraisal that supports this scheme often fails to adequately describe the art. It may not address the value characteristics, such as rarity, age, quality, condition, stature of the artist, price paid, and the quantity purchased.
Participating in an illegal scheme to avoid paying taxes can result in repayments of the taxes owed with penalties and interest and potentially even fines and imprisonment
Taxpayers should remember they are always responsible for the accuracy of information reported on their tax return. In order to properly claim a charitable contribution deduction for an art donation, taxpayers must keep records for legitimacy, such as:
- Name and address of the charitable organization that received the art.
- Date and location of the contribution.
- Detailed description of the donated art.
If the claimed deduction for an art donation is:
- $250 or more, the taxpayer must obtain a contemporaneous written acknowledgement of the contribution from the charitable organization. They need to have that document on or before the earlier date on which they file a return for the taxable year in which they made the contribution, or the due date, including extensions, for filing such return.
- More than $500 but not over $5,000, the taxpayer must also complete a Form 8283, Noncash Charitable Contribution, Section A, and attach it to their tax return.
- More than $5,000, the taxpayer must complete Form 8283, Section B, including signatures of qualified appraiser and donee. They must also obtain a qualified written appraisal of the donated property.
- $20,000 or more, the taxpayer must do all the above and attach a complete copy of the qualified appraisal to their return. They should also have a high-resolution photo or digital image of the object and provide it, if asked.
Do you know how to properly claim a charitable contribution deduction for an art donation?
Do you know what kind of information you must have to support the charitable contribution deduction you claim on your return?
Who is your professional tax advisor?
