The IRS has cautioned taxpayers to be vigilant about promotions involving exaggerated art donation deductions that may target high-income individuals and has also provided valuable tips to help people steer clear of falling into such schemes. Taxpayers can legitimately claim art donations, but dishonest promoters may employ direct solicitation to make unrealistically promising offers. In a bid to boost compliance and protect taxpayers from scams, the IRS has active promoter investigations and taxpayer audits underway in this area.
Also, the IRS has employed various compliance tools, including tax return audits and civil penalty investigations, to combat abusive art donations. Taxpayers, especially high-income individuals, are advised to watch out for aggressive promotions. Additionally, following Inflation Reduction Act funding the IRS has intensified the efforts to ensure accurate tax payments from high-income and high-wealth individuals.
The Service has advised taxpayers to watch-out for the following red flags:
- Be wary of purchasing multiple works by the same artist with little market value beyond what promoters claim.
- Watch for specific appraisers arranged by promoters, as their appraisals often lack crucial details.
- Taxpayers are responsible for accurate tax reporting, and engaging in tax avoidance schemes can lead to penalties, interest, fines, and even imprisonment.
- Charities should also be cautious not to inadvertently support these schemes.
In order to to properly claim a charitable contribution deduction for an art donation, a taxpayer must keep records to prove:
- Name and address of the charitable organization that received the art.
- Date and location of the contribution.
- Detailed description of the donated art.
Also, The IRS has a team of trained appraisers in Art Appraisal Services who provide assistance and advice to the IRS and taxpayers on valuation questions in connection with personal property and works of art.
Finally, the taxpayers can report tax-related illegal activities relating to charitable contributions of art using:
- Form 14242, Report Suspected Abusive Tax Promotions or Preparers, to report a suspected abusive tax avoidance scheme and tax return preparers who promote such schemes.
- They should also report fraud to the Treasury Inspector General for Tax Administration at 800-366-4484.