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Creativity in Art -- But Not in Charitable Donations of Artwork

Dec 12, 2023

The French visual artist Henri Matisse stated “Creativity takes courage.” The courage of artists has contributed to magnificent and creative artwork through the centuries. However, in light of recent IRS guidance, taxpayers should be much less courageous with claiming deductions related to the donation of artwork.

The Improper Art Donation Deduction Scam

On October 5, 2023, the IRS warned high-income taxpayers to be wary of promoters encouraging the donation of artwork in exchange for exaggerated income tax deductions. These promoters specifically target high-income taxpayers and encourage them to buy various pieces of art at an advertised “heavily discounted” price. The promoter often bundles its own services into the price, such as storage and shipping of the art and arranging for the artwork’s appraisal. 

Promoters encourage the taxpayers to hold the artwork for over one year, and then donate it to a charity selected or recommended by the promoter. The promoter also facilitates the appraisal of the artwork to ‘ensure’ its appraised value significantly exceeds the art’s actual value. Taxpayers then report an over-inflated charitable deduction for the donated art, potentially without knowing it is inaccurate.

Increased IRS Audits

The IRS is actively working to increase compliance of high-income taxpayers.  This attention has led to an increase in the number of audits of these taxpayers. with a significant number of examinations focused on art donations. As of early October 2023, the IRS has completed more than 60 taxpayer audits related to art donations, resulting in tax adjustments of more than $5M.1 To avoid these issues on audit, taxpayers must be wary of promoters promising charitable deductions that seem too good to be true.

Red Flags for Taxpayers to Watch Out For

The IRS advised taxpayers to be on alert for the following red flags that could indicate a promoted art donation scheme:

  • Being encouraged to buy multiple works by the same artist that have little to no market value outside of the promoter’s advertising;
  • The promoter’s selection of appraisers; and
  • A resulting appraisal that fails to adequately describe the art (for example: age, quality, condition, rarity of the art, reputation of the artist, price paid, etc.)

Deductions for Proper Donations Are Still Allowed

Taxpayers may still make charitable donations of artwork and properly claim the resulting charitable contribution deduction. To do so, taxpayers should:

  • Make the donation to a charitable organization for a related use (for example, to a university art museum for display, but not a foodbank);
  • Properly substantiate the donation; and
  • Carefully determine what the value of the donated artwork claimed as a deduction should be:
    • In the case of a donor who is an art collector or investor, the artwork’s fair market value or
    • In the case of a donor who is an art dealer or the artist themselves, the lesser of the artwork’s basis or fair market value.

The wisdom of “creativity takes courage” should be limited to the art world, and not applied to tax preparation. With care and proper planning, taxpayers may claim deductions for charitable donations of artwork. However, overly courageous taxpayers who use promoters to creatively underreport their income tax liabilities will face increased IRS scrutiny in audits.

1IR 2023-185 (Oct. 5, 2023)

In this Issue: Q4 2023

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Kristen De Noia

Kristen De Noia is a Senior Tax Manager with tax compliance and planning experience focusing on personal and fiduciary income taxation, gift taxation and trusts and estates including high net worth families and closely held business owners.

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