The IRS has been able to deny deductions by finding small holes in records or tax returns. The focus is currently on two areas but recent success means there will be more.
- S corp losses. Bookkeepers and tax preparers must be sure they can document what an S corp shareholder’s basis is in the stock and how it changed over time since the corp was formed.
- Charitable contributions. Charitable contributions made by individuals or businesses are the other focus.
One way the IRS can disallow deductions is when there is no substantiation from the charity.
Note: The substantiation must state the date and amount of the contribution and whether the contribution was cash or property. It must also state that the donor did not receive any benefit in return or, if there was a benefit, its value.
Example: the substantiation from the charity did not contain a statement that no benefit was received for the contribution, so the deduction was not
allowed. The fact of the donation was not in question.
Charitable contribution deductions also can be disallowed when the tax return does not contain all the information required—which would be based on whatever substantiation you gave the preparer.
Different amounts of disclosure are required, depending on the amount and whether it was cash or property. The IRS and the courts do not dispute
the contributions made, but disallow the deductions for other reasons, including missing or incomplete documentation.