On October 5, 2023, the IRS issued a news release warning taxpayers to keep an eye out for promotions concerning inflated art donation deductions. Promoters of these schemes may solicit to taxpayers directly, typically high-income taxpayers, to buy art at a “discounted” price. Promoters then advise donating the art at least a year after purchase for a higher value. Taxpayers should be wary if approached to purchase “discounted” art and should be observant of a few red flags.

A promoter may recommend that taxpayers donate art annually, and suggest purchasing a quantity that guarantees certain deductible amounts. Promoters may also encourage a taxpayer to purchase multiple works by the same artists, which have little to no market value contrary to the promoter’s pitch. Promoters may also connect taxpayers to specific appraisers that will support the scheme. Keep an eye out especially since appraisals prepared for this scheme tend to not include major value characteristics, including rarity, age, quality, condition, stature of the artist, price paid, and the quantity purchased.

The IRS is actively involved in abusive art donation promoter investigations and audits of taxpayers making these donations. Currently, the IRS has completed more than 60 taxpayer audits with more on the horizon. Taxpayers that participate in this scheme may be subject to repayment of the tax owed with penalties and interest and may even be subject to fines or imprisonment.

Taxpayers that do claim a noncash charitable contribution deduction for an art donation must provide records to substantiate the donation. Additional requirements occur for a taxpayer depending on the value of the claimed deduction. If the claimed value is $250 or more, the taxpayer must acquire a contemporaneous written acknowledgment of the contribution from the charitable organization. If the claimed value is greater than $500 but no more than $5,000, the taxpayer must also complete Form 8283, Noncash Charitable Contributions, Section A, and attach to their tax return. If the value of the art is more than $5,000, the taxpayer must complete Form 8283, Section B, with signatures from the qualified appraiser and donee as well as receive a qualified written appraisal on the art. Lastly, if the value is $20,000 or more, the taxpayer must include the aforementioned information and attach the qualified appraisal to the tax return. The IRS also recommends attaching a high-resolution photo of the art to the return.