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Improper Art Donation Deduction Promotions: IRS Sounds Alarm

By Jeffrey M. Glassman on October 13, 2023
The IRS is warning taxpayers not to claim improper art donation deductions (HERE) and provides tips to help people avoid getting ensnared by an illicit art donation promotion. The IRS says the following about how the scheme might work:

Promoters encourage taxpayers to buy various types of art, often at a "discounted" price. This price may also include additional services from the promoter, such as storage, shipping and arranging the appraisal and donation of the art. The promoter promises the art is worth significantly more than the purchase price.
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.
The IRS also notes certain red flags of which taxpayers should be aware:
Taxpayers should be wary of buying multiple works by the same artist that have little to no market value outside of what the promoter might be advertising.

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.
The IRS’ focus on art donations is not new. The IRS has its own team of trained art appraisers and regularly relies on an “Art Advisory Panel” comprised of independent art experts, who help the IRS without compensation. The Art Advisory Panel often provides advice to the IRS without knowing on which side of the tax issue the IRS stands. For example, higher values might mean higher deduction amounts, but lower values might mean less estate or gift tax.

If you have any questions about this blog post or otherwise, please do not hesitate to contact me at jglassman@meadowscollier.com or (214) 749-2417.