The IRS has cautioned taxpayers to be on the alert for promotions involving “exaggerated art donation deductions” that are aimed at high-income filers. (IR 2023-185)
The basics of such a scheme are for unscrupulous promoters to persuade taxpayers, usually high-income earners, to purchase the art, wait to donate the art and then take an incorrect deduction for the art donated.
As described by the agency, promoters encourage taxpayers to buy art work at a “discounted” price while promising the art is worth significantly more than the purchase price. They encourage purchasers to donate the art after waiting for at least a year and to claim a tax deduction for an inflated fair market value, which is substantially more than the purchase price. Promoters also may arrange for certain charities to take the donations.
The IRS made clear that abusive tax schemes are on the agency’s radar. “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. More than 60 taxpayer audits have been completed with more in the works; those audits have produced more than $5 million in additional tax,” the agency stated.
Red flags that signal danger include buying multiple works by the same artist and promoters engaging specific appraisers for participants to use.
The warning included information about properly claiming an art donation and the functioning of the IRS Art Appraisal Services.
“Aggressive creativity in art donation deductions can paint a bad picture for people pulled into these schemes,” said IRS Commissioner Danny Werfel. “There are legitimate ways to claim an art deduction, but taxpayers should be careful to understand the rules and watch out for inflated values or questionable appraisals.”
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