The Newsroom Topics
Issue Number: IR-2023-185
Inside This Issue
IRS warns taxpayers of improper art donation deduction promotions; highlights common red flags
WASHINGTON – The Internal Revenue Service today warned taxpayers to watch for promotions involving exaggerated art donation deductions that can target high-income filers and offered special tips for people to use to avoid getting caught in a scheme.
There are ways for taxpayers to properly claim donations of art. But some unscrupulous promoters may use direct solicitation to promise values of art that are too good to be true. These promoters persuade taxpayers, usually high-income taxpayers, to purchase the art, wait to donate the art and then take an incorrect deduction for the art donated. As part of a larger effort to increase compliance work on high-income individuals and corporations, and protect taxpayers from scams, the IRS has active promoter investigations and taxpayer audits underway in this area.
“Creativity in art is a beautiful thing, but aggressive creativity in art donation deductions can paint a bad picture for people pulled into these schemes,” said IRS Commissioner Danny Werfel. “This is another example where people should be careful when it comes to aggressive marketing and promotions. There are legitimate ways to claim an art donation, but taxpayers should be careful to understand the rules and watch out for inflated values or questionable appraisals. Beauty is not always in the eye of the beholder when it comes to tax deductions of art.”
The IRS is using a variety of compliance tools to combat abusive art donations through audits of tax returns and civil penalty investigations. The IRS reminds taxpayers, including high-income filers that may be targets of these schemes, to watch out for aggressive promotions. In addition, following Inflation Reduction Act funding, the IRS is focused on increasing compliance efforts on high-income and high-wealth individuals to ensure filers pay the right amount of tax owed.
How the scheme works
These schemes are designed to encourage purchasers to donate the art after waiting at least one year and to claim a tax deduction for an inflated fair market value, which is substantially more than they paid for the artwork. Promoters may suggest taxpayers donate art annually and allow them to buy a quantity of art that guarantees a specific deductible amount. Promoters may even arrange for certain charities to take the donations.
IRS conducting promoter investigations, taxpayer audits involving art donations
The IRS has multiple active abusive art donation promoter investigations underway and questionable art donations by taxpayers have been – and will continue to be — under audit when questions arise. These donations can involve art valued at millions of dollars. More than 60 taxpayer audits have been completed with more in the works; those audits that have produced more than $5 million in additional tax.
Watch for red flags
Another red flag in this scheme is that promoters might line up specific appraisers for participants to use. An appraisal that supports this scheme often fails to adequately describe the art. It may not address the value characteristics, such as rarity, age, quality, condition, stature of the artist, price paid and the quantity purchased.
Taxpayers should remember they are always responsible for the accuracy of information reported on their tax return. Participating in an illegal scheme to avoid paying taxes can result in repayments of the taxes owed with penalties and interest and potentially even fines and imprisonment. Charities also need to be careful they don’t knowingly enable these schemes.
Properly claiming an art donation
The above items are required to properly claim a charitable contribution deduction. There are additional requirements based on the value of the claimed deduction. If the claimed deduction for an art donation is:
See Publication 561, Determining the Value of Donated Property, for requirements of a qualified written appraisal.
IRS Art Appraisal Services (AAS)
Although organized under the IRS Independent Office of Appeals, Art Appraisal Services assists IRS’ examination function, lawyers from the IRS Office of Chief Counsel and the Department of Justice, as well as Appeals Officers, on the valuation of personal property and works of art.
In certain cases, the Art Appraisal Service is advised by the Commissioner’s Art Advisory Panel. The panel is comprised of up to 25 renowned art experts who serve without compensation and provide advisory opinions. IRS Appraisers, the Director of Art Appraisal Services, and panel members meet regularly to discuss the valuation of art works submitted for review by Art Appraisal Services.
How to report tax schemes
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