IRS Eyes Charitable Donation Abuse In New Audits, Tax Pros Say
The Internal Revenue Service is ramping up audits targeting charitable donations involving assets with potentially inflated values, signaling a renewed enforcement effort despite recent staffing reductions and leadership turnover at the agency.
Tax attorneys say the IRS is increasingly examining non-cash charitable contributions ranging from artwork and intellectual property to medical equipment and other hard-to-value assets. The heightened scrutiny follows years of enforcement against syndicated conservation easements, a controversial tax strategy in which partnerships claim large charitable deductions for donated land.
“Tax controversy practice, questionable charitable donation schemes have become more common,” said Brian McManus, global chair of Latham & Watkins. “There have always been schemes involving fraudulent or inflated charitable contributions. Tax professionals are continuing to encounter transactions the IRS considers abusive.”
The agency’s renewed focus comes after significant internal changes. During the Trump administration’s government downsizing efforts, the IRS lost roughly one-quarter of its workforce and experienced substantial leadership turnover. Ken Kies, who served as assistant Treasury secretary for tax policy and acting chief IRS counsel, is also departing after criticizing conservation easement tax shelters and similar valuation-based strategies.
“The valuation concerns that once centered on conservation easements are now appearing in other types of charitable transactions,” said Kies.
His expected successor, tax controversy attorney Jim Gadwood, is awaiting Senate confirmation.
Billions In Non-Cash Donations
IRS data shows taxpayers claimed more than $160 billion in non-cash charitable contribution deductions in 2023, the latest year for which figures are available. Approximately one-third of those deductions came from taxpayers earning at least $10 million annually, many of whom donated assets such as corporate stock, mutual funds and other investments.
Although IRS audits slowed during last year’s staffing disruptions—with practitioners reporting prematurely closed examinations and reassigned cases—the agency now appears to be returning to a more active enforcement posture.
“Agents who gained experience handling conservation easement cases are well positioned to investigate other charitable contribution issues,” said Melissa Wiley, a tax controversy partner at Kostelanetz. “Those employees have already received specialized training on charitable deduction rules, making it easier for the IRS to expand audits into additional categories of donated assets.”
Tax professionals also report seeing a noticeable increase over the past six months in examinations involving inflated asset valuations and questionable charitable organizations. At the same time, the Trump administration has indicated it intends to place greater emphasis on oversight of tax-exempt organizations. Some critics have expressed concern that the initiative could result in more politically sensitive examinations because charitable recipients are themselves tax-exempt entities.
Technical Errors Become Audit Targets
Rather than immediately disputing the appraised value of donated property, IRS auditors frequently challenge whether taxpayers complied with the technical requirements needed to claim the deduction.
Common issues include missing filing deadlines, incomplete paperwork or questions about whether a qualified appraisal was obtained. Tax attorneys say these procedural challenges are often less expensive for the government than hiring valuation experts to contest an asset’s market value.
“Many of the charitable contribution audits she has handled involve properly valued donations, with disputes instead centering on technical compliance, said Michelle Levin, a shareholder at Dentons.
The IRS continues to pay particular attention to assets that are difficult to value, including privately held business interests, artwork, intellectual property and similar property. However, practitioners say the examinations now extend across a broad range of donated items, including medical supplies and electronics.
“I’m seeing more audits focused on valuation issues involving both charitable donations and energy projects eligible for investment tax credits,” said Daniel Strickland, a tax partner at Holland & Knight. “In my view, many of the agency’s current enforcement efforts stem from concerns about aggressive valuation practices, regardless of the type of tax benefit being claimed.”
Source: Bloomberg Tax
