The IRS is warning against a tax scam involving frivolous art donation tax deductions, where promoters promise “too good to be true” art values. Unlike some other tax scams that the IRS warns taxpayers about, this art scam specifically targets high-income taxpayers.
The warning comes as the IRS ramps up enforcement on high-income earners including millionaires and “tax cheats.” IRS audits of questionable donations are already underway through which the agency has reportedly recovered more than $5 million in additional tax owed.
In a statement regarding the art scam, IRS commissioner Danny Werfel offers a reminder for taxpayers: “Beauty is not always in the eye of the beholder when it comes to tax deductions of art.”
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So, how can the wealthy avoid falling victim to this art deduction tax scam? According to Werfel, taxpayers should “understand the rules” and “watch out for red flags like inflated values or questionable appraisals.”
Art donation tax scam
In this particular scam, promoters offer art purchases at prices that appear discounted. Promoters may ask scam victims to keep the art for at least one year before donating it to charity with the promise of higher values (which they say means higher tax deductions). But in reality, the fair market value of the art is nowhere near the amounts promised by the scammers.
Claiming frivolous charitable donation amounts can lead to tax consequences like penalties and interest for the taxpayer (more on that below). So, here are a few red flags to watch for to avoid this scam.
- Purchasing multiple pieces of art from the same artist when the pieces appear to have little value
- The promoter insists you use a specific art appraiser
- Appraisals that don’t address factors such as the price paid, how rare the art is, the age of the piece, etc.
The IRS says, if taxpayers come across any of the above warning signs, they should report the scam on IRS Form 14242 and contact the Treasury Inspector General for Tax Administration at 1-800-366-4484.
Legally claiming charitable donations
While charitable donations can lower taxable income for high-income taxpayers, specific rules must be followed. It is essential to keep records of art donations when you plan to claim deductions for them on your federal income tax return.
At the very least, you need the charity’s name and address, and date, and location of the donation, and a “detailed description” of the art you donate. The rules for art donations become more complex when contribution amounts reach $250.
- When deducting art valued at $250 or more, you must receive a contemporaneous written acknowledgment from the charity.
- Art valued at over $5,000 requires a written appraisal and signature from a qualified appraiser.
- If donating art valued at $200,000 or more, the IRS can ask you to provide a high-resolution digital image of the art.
Taxpayers with questions regarding art valuations can contact the IRS’ Art Appraisal Services for assistance.
Will charitable donations trigger an audit?
The IRS has been increasing its efforts to hold high-income filers accountable for taxes owed, and the agency has already completed 60 taxpayer audits involving questionable art donations, some worth millions of dollars. The agency says it will continue to audit returns that contain suspected inflated deduction amounts.
That said, it's important to keep in mind that art donations are not the only contributions that can trigger an audit. Large charitable donations of any kind could place you on the agency’s radar.
Although no one wants to face a tax audit, being audited by the IRS isn’t the only consequence that can result from claiming fraudulent charitable donation amounts. Evading taxes by participating in the scheme can result in financial penalties and interest accrual, not to mention the repayment of actual taxes owed. In some cases, taxpayers claiming inflated deduction amounts may also face imprisonment.
Consider working with a tax professional to ensure you follow all the rules for deducting charitable contributions. Given the IRS’ increased tax enforcement efforts for wealthy filers, even those who have gotten away with frivolous deductions in the past aren’t likely to in the future.
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