New EA Study Material: Taxpayers Denied Deduction of Foreign Charitable Giving

October 13, 2011 by  Filed under: Taxes 

In case you missed this bit of news in your enrolled agent classes, the IRS prevailed in tax court against a taxpayer who improperly deducted church donations. The case involved a married couple that was audited for a prior year tax return. The implications of this ruling are important to enrolled agent training.

This court case affects the rendering of accurate advice to taxpayers about certain charitable donation procedures. In addition, an enrolled agent tax preparer should learn about the conditions in this case in order to avoid inadvertently reporting an ineligible tax deduction.

The issue revolved around charitable contributions totaling $25,050 that consisted of wire transfers to the wife’s relative, who then distributed the money for support of efforts by the Catholic Church in a foreign country. In addition, some of the money was used for airfare expense incurred to render services for overseas churches.

The joint-filing wife on the tax return was born in a foreign country. She immigrated to the US and married a US citizen. She is a member of a church that belongs to the local Catholic diocese near her home in Texas.

The taxpayers contributed money to rebuild Catholic churches in the wife’s country of birth. During a trip to her native country, the wife was detained by local police, which interrogated her and asked questions about her family’s support of the former government. Fearing for her safety, the wife devised a plan to disguise her contributions to Catholic churches in her native country. She sent money by wire transfer to the personal bank account of her cousin who lived in the foreign nation. The cousin then transferred the money to the Catholic churches in that country.

In their tax return preparation, a deduction was claimed for charitable contributions relating to the wife’s aid to Catholic churches in her country of birth. The deductions included the cost of an airplane ticket for the wife’s travel overseas to provide services to Catholic churches. Also included were the wire transfers to the cousin. An IRS examination of the tax return disallowed the charitable deductions related to the wife’s efforts that benefited Catholic churches in a foreign country.

EA study material clarifies that a charitable contribution is tax-deductible only when given to an entity organized in the United States or under US laws. The taxpayers in this court case argued that the ultimate beneficiary of the donations was the Roman Catholic Church, which is a qualified charity under the tax code. Their claim centered on the notion that the Catholic Church is a universal organization so that donations to any individual church in the wife’s native country are qualified charitable contributions. In an important lesson for enrolled agent education, the tax court disagreed. This decision was based upon the explicit language in the tax code requiring organization of charitable recipients under the laws of the United States.

The wife’s airfare to the foreign country was also denied as a deduction due to lack of support for the position that the wife was specifically working for a qualified charitable organization. Despite the sincerity of a taxpayer’s goodwill, tax deduction of charitable contributions demand adherence to the specifics of the tax code. Consequently, a clear part of enrolled agent ethics is assurance that tax deduction of charitable work in a foreign country occurs only when the services are rendered under the direction or administration of an organization established under the laws of the US – such as a local church.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for enrolled agent classes and tax professionals. Access to free questions for the enrolled agent training is available on their website.

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