Question

I:15 62 A client, Mal Manley, fills out his client questionnaire for the previous year and on it provides information for the preparation of his individual income tax return. The IRS has never audited Mal’s returns. Mal reports that he made over 100 relatively small cash contributions totaling $24,785 to charitable organizations. In the last few years, Mal’s charitable contributions have averaged about $15,000 per year. For the previous year, Mal’s adjusted gross income was roughly $350,000, about a 10% increase from the year before.

Required: Applying Statements on Standards for Tax Services No. 3, determine whether you can accept at face value Mal’s information concerning his charitable contributions. Now assume that the IRS recently audited Mal’s tax return for two years ago and denied 75% of that year’s charitable contribution deduction because the deduction was not substantiated. Assume also that Mal indicates that, in the previous year, he contributed $25,000 (instead of $24,785). How do these changes of fact affect your earlier decision?

Answer 1

Mal's information at face value concerning his charitable contributions can be accepted on the fact that the Statement of Standards for Tax services Number allows a CPA to rely in good faith thus can faith without verification, on information furnished by the taxpayer or by third parties.

Mal’s recent claim of charitable donations is inconsistent with Mal’s charitable contributions from past years. In the prior year Mal had reported 100 small charitable donations for the amount $24,785, while during the past years, Mal claimed an average of $15,000 in charitable donations. This rise in the amount on donations as charity is considerably higher in comparison to Mal’s 10% increase in Adjusted Gross Income (AGI).

In the scenario of the IRS auditing Mel’s return and denying nearly 75% of the reported contributions in charity, displays and allows for a reasonable assumption that the current year’s charitable contributions may too be overstated.

Assuming Mal reporting an amount of $25,000, instead of the $24,785, could may be because Mal has estimated what he has contributed in charitable donations. As Mal’s CPA, under such scenario, I would ask for evidence in the shape of documentations such as receipts of the claimed/reported contributions in the charity.