Can Taxpayers Face Penalties for Improper Art Donation Deductions?

 Posted on October 30, 2023 in Taxation Law

Art is a passion for many people, and some are fortunate enough to acquire impressive collections over several years. In some situations, a person may wish to donate artwork to charitable organizations. Not only does this allow a collector to give back to his or her community, but it also provides potential tax benefits in the form of deductions. 

However, taxpayers who donate artwork can face penalties if they improperly claim deductions on their tax returns. The Internal Revenue Service (IRS) closely scrutinizes these types of deductions due to their potential for abuse and misrepresentation, and it may conduct tax audits in situations where art donations and tax deductions seem suspicious. For taxpayers who wish to donate art or claim other types of deductions, an attorney with experience in tax law can provide guidance and help avoid potential penalties.

IRS Identifies Art Donation Deduction Schemes

As part of its ongoing efforts to combat tax evasion and abusive tax schemes, the IRS has noted the prevalence of tax scams involving the purchase and donation of art. Promoters of these schemes may target high-income taxpayers and encourage them to purchase art, wait at least one year as it allegedly increases in value, and then donate it to charity in order to claim tax deductions. Promoters may also offer services such as shipping, storage, and appraisal of art while claiming that a taxpayer can claim deductions based on a substantially higher value than what they originally paid.

Taxpayers are responsible for ensuring that the information reported on tax returns and other documents is accurate. Even if a taxpayer relies on information provided by the promoter of an art donation scheme when claiming deductions, they could be subject to penalties if donated art was valued inaccurately or if they claimed deductions in excess of what should have been allowed.

The Importance of Proper Valuation

The requirements that taxpayers will need to meet when claiming deductions for donated artwork will depend on the value of their donations. They must keep records of the name and address of the charitable organization that received their donation, the date and location of the donation, and detailed descriptions of the artwork that was donated. Other reporting requirements include:

• For donations of at least $250, a written acknowledgment of the contribution must be obtained from the charitable organization that received the donation.

• For donations of art valued between $500 and $5,000, a taxpayer must file Form 8283 (Noncash Charitable Contribution) with their tax return.

• For donations of more than $5,000, signatures of the appraiser and recipient must be included on Form 8283. A written appraisal of the donated artwork must also be obtained by the taxpayer.

• For donations above $20,000, a complete copy of the appraisal must be included with the tax return. A taxpayer may also be required to provide a high-resolution photograph of the artwork that was donated.

When artwork is appraised, the appraiser must have the relevant qualifications, and appraisals must adequately describe the artwork. An appraiser should consider factors such as artist reputation, condition, rarity, age, market demand, the price originally paid, and the quantity originally purchased when determining the fair market value of art. An appraisal that does not meet these requirements may be considered to be inaccurate, and a taxpayer may face penalties for claiming deductions that exceeded the actual market value of art that was donated.

Penalties for Overstating Deductions

If a taxpayer is found to have substantially understated their tax liability due to an overvaluation of donated artwork, they may be subject to accuracy-related penalties under Section 6662 of the Internal Revenue Code. These penalties can amount to 20 percent of the amount of underpayment resulting from the inflated deduction. The taxpayer will also be required to pay the total amount of taxes owed, as well as interest. In some cases, they could even face criminal charges that could lead to additional fines or imprisonment.

Contact Our San Jose, CA Tax Audit Lawyer

If you are considering deducting artwork on your tax return or are facing a tax audit based on issues such as deductions claimed for charitable donations, you will need to understand the steps you can take to address these concerns. At John D. Teter Law Offices, our San Jose tax law attorney can provide you with representation during your audit, helping you determine the best ways to respond to the IRS and avoid or minimize potential penalties. Contact our firm today at 408-866-1810 to set up a consultation and learn how we can assist you.