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Journal of Economics and Finance

Erschienen in:

01.01.2015

The effect of the U.S. federal income tax appraisal requirement on noncash charitable contributions for individuals

verfasst von: James S. Serocki, Kevin J. Murphy

Erschienen in: Journal of Economics and Finance | Ausgabe 1/2015

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Abstract

This article examines whether certain Internal Revenue Code (IRC) substantiation requirements of the charitable contribution deduction for federal income tax changed the behavior of taxpayers claiming large noncash contributions. Specifically prior to 1985, taxpayers were required to disclose certain information regarding noncash contributions. After 1984, however, a qualified appraisal was required to claim the charitable contribution deduction for noncash contributions over $5,000. Despite the increased substantiation requirement, we find evidence that the percentage of taxpayers claiming more than $5,000 in noncash contributions increased post 1984. Moreover, there is persuasive evidence that secondary tax evasion increased significantly during the same period. In this regard, we find that the percentage of taxpayers claiming noncash contributions just under the $5,001 appraisal threshold (arguably to avoid the more rigorous appraisal requirement) increased significantly post 1984 as did the percentage of self prepared tax returns, both findings indicative of secondary tax evasion.

Vorheriger Artikel Health care and the cross-section of US stock returns

Nächster Artikel CEO age, education, and introduction of hedging in the oil and gas industry

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Appraisal summary requires numerous details, including signatures e.g. by the qualified appraiser (RIA 2013); note if the noncash contribution is greater than $500,000, the qualified appraisal must be attached to the donor’s return.

Note there are also other tax limitations affecting noncash contributions including type of assets contributed (e.g. appreciated assets), income deduction limitations (e.g. overall 50 % of adjusted gross income with differing percentages for certain types of property), and type of qualified charitable organization receiving the contribution (Greene and McClelland 2001).

n = 155,212 in 1977; n = 171,508 in 1980; n = 122,889 in 1983; n = 96,587 in 1989; n = 115,594 in 1991; n = 143,221 in 2001; and n = 150,047 in 2004.

At the time we conducted our empirical analysis, 2004 was the most recent year available from the Public Use Tax files; accordingly we considered relevant law for this data period. For recent data years there is a time lag before becoming publically available for purchase from IRS/SOI (Statistics of Income). The years selected for the data period are representative and also reflect a typical evolvement of tax law changes over periods of time (e.g. tax rates).

Also see Martinez-Vazquez and Rider (2005) who found that increased enforcement effort has a positive effect on compliance.; see also supra, discussion for 2013 pg. 3, KPMG 2013, TIGTA 2012 report, finding about 60 % of taxpayers claiming more than $5,000 noncash charitable contributions on 2010 tax returns, showed noncompliance with reporting requirements.

The annualized growth rate in the number of taxpayers between 1977 and 2004 is 1.5 % per year and the annualized growth rate in taxpayers claiming a noncash charitable deduction is 6.6 % per year.

The annualized growth rate from 1977 to 1983 is 16.9 % per year.

The annualized growth rate in the category from 1989 to 2004 is 12.9 %.

Of course, such an incentive serves as a benefit to tax collections, as it reduces the size of total deductions. IRS Publication 561, Determining the Value of Donated Property (Rev. April, 2007), states a taxpayer may use among other sources, the Yellow Pages or internet to find a qualified appraiser. Based on anecdotal information (general conversations with national and local appraisers), $100–300 was the estimated cost ($90.55 in 1984 dollars for $200 in 2012 dollars, using InflationData.com CPI inflation calculator) for a written appraisal on property (e.g. art) with a $5,000–6,000 fair market value.

In addition, there are other less quantifiable variables that may factor into a taxpayer’s decision on whether to get an appraisal versus just understating the donation to avoid the requirement including perceived risk of exposing the taxpayer’s Form 1040 to an IRS audit, fear of penalties, or lack of taxpayer sophistication in understanding and/or complying with the complicated IRS requirements under the regulations. See Joulfaian and Rider (1996) who found marginal tax rates had a moderate influence on reporting of income.

For example, the largest noncash contribution deduction in the 2004 data exceeds $86 million dollars.

See generally footnote 10; it is significant to also note that the over $5,000 appraisal requirements enacted in 1984 did not provide for indexing for inflation .

Note that the SOI data do not provide information on this variable in 1977, 1980, and 1989.

For example, use of a paid tax preparer is what economists refer to as a normal good, a good for which demand increases as income/wealth increases. Incomes in the United States have generally grown over time, hence the demand for paid preparers rises with such income growth. An additional secular factor likely at play is the aging of the population (the baby boom generation) that takes place throughout the period. Older taxpayers are presumably more likely to outsource tax preparation to a tax professional and, therefore, again we would expect to see a lower propensity to self-prepare returns as the population ages. Of course, age and income are positively correlated, so it is difficult to disentangle the effect of income on self-preparation from the effect of age on self-preparation.

Tax return preparers have their own professional standards to be met (e.g. Treasury Circular 230, AICPA ethical standards, state licensing for CPAs) plus IRC sanctions e.g. under Sec. 6694.

In 2001 and 2004, we observe some increase and volatility in the rate of self-preparation in this category, but in the immediate period following implementation of the new law it’s clear that the rate of self-preparation actually dropped.

The use of consumer computer based tax preparation software for F1040 tax returns has increased about 40 % over the 1997–2004 period (IRS, Pub. 4832, 2009). When tax software is considered a mechanical return preparation aid for taxpayers an exception exists and typically would not be considered as a tax preparer (RIA, FTC 2d, Para. S-1110); in IRS Pub. 4832, p. 10 (12–2009), taxpayers self-prepare their returns when using consumer tax preparation software. There may perhaps be some informational effect on taxpayers who had not known certain disclosures (e.g. use of noncash IRS form) were required, which may show up as a software output diagnostic.

For example, 1983 median adjusted gross income for taxpayers with NCC > $6,000 was $104,900. By comparison, the median adjusted gross income for all taxpayers in 1983 was $14,830. (Authors’ tabulation from the SOI data.)

Ackerman D, Auten G (2006) Floors, ceilings, and opening the door for a non-itemizer deduction. Natl Tax J 59(3):509–530

Buchheit S, Lightner T, Masselli JJ, Ricketts RC (2005) Noncash charitable giving: evidence of aggressive taxpayer reporting following a compliance change. J Am Tax Assoc (Suppl) 27:1–17CrossRef

Christian C, Gupta S (1993) New evidence on secondary evasion. J Am Tax Assoc 15(1):72–93

Fischer CM, Wartick M, Mark MM (1992) Detection probability and taxpayer compliance: a review of the literature. J Account Lit 11:1–46

Greene P, McClelland R (2001) Taxes and charitable giving. Natl Tax J 54(3):433–453

Herman T (2007) Tax report: IRS is getting less charitable; new regulations raise the bar on gift reporting. Wall Street J. Eastern edition, p D 4

Internal Revenue Service (IRS) (2009) Return preparer review, Publication 4832 (Rev. 12)

Joulfaian D (2005) Basic facts on charitable giving, Office of Tax Analysis, Department of Treasury, OTA Paper 95

Joulfaian D, Rider M (1996) Tax evasion in the presence of negative income tax rates. Natl Tax J 49(4):553–570

Kovach RJ (2006) New rulemaking approaches to improve federal tax administration through use of precisional substitutes that avoid valuation uncertainties. Hous Bus Tax J 6:1–32

KPMG (2013) IRS to revise form 8283, TaxNewsFlash, 1/16/13

Martinez-Vazquez J, Rider M (2005) Multiple modes of tax evasion: theory and evidence. Natl Tax J 58(1):51–77

Orszag P (2009) The budget and charitable donations, Office of Management and Budget, Available at: www.whitehouse.gov/omb

Report of the President’s Advisory Panel on Federal Tax Reform (2005) Washington D.C. Available at: http://govinfo.library.unt.edu/taxreformpanel

RIA (2007) Federal tax coordinator, Para. K-3949

RIA (2013) Federal tax coordinator 2d, Para. K- 3968, S-1110

Schmidt A, Werner E (2005) “Secondary tax evasion” and the earned income tax credit. J Am Tax Assoc 27(2):27–55CrossRef

Slemrod J (1985) An empirical test for tax evasion. Rev Econ Stat 67(2):232–238CrossRef

Treasury Inspector General for Tax Administration (TIGTA) Many taxpayers are still not complying with noncash charitable contribution reporting requirements, 12/20/12, reference no. 2013-40-009

Titel: The effect of the U.S. federal income tax appraisal requirement on noncash charitable contributions for individuals
verfasst von: James S. Serocki
Kevin J. Murphy
Publikationsdatum: 01.01.2015
Verlag: Springer US
Erschienen in: Journal of Economics and Finance / Ausgabe 1/2015
Print ISSN: 1055-0925
Elektronische ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-013-9264-0

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