Original Message:
Sent: 1/8/2025 11:28:00 AM
From: John Smilde
Subject: RE: Direct Debits Timeframe
I agree, and that is close to verbatim what IRS Pub. 526 says as well. The question then is when is the charge made. Although it can be different in different configurations, my understanding is the typical sequence of events is:
1. Cardholder initiates a transaction on 12/31 or earlier.
2. Payment Gateway transmits card data to the payment processor.
3. Payment Processor sends authorization request to the card network.
4. Card Network forwards request to the card issuer.
5. Card Issuer approves or declines the transaction and locks down the funds.
Steps 1-5 are pretty much instantaneous. At the end of step five, the donor has surrendered the funds. They may be visible on the account as funds on hold for a while but they have surrendered control. If surrendering access to the funds is considered being charged. Then at this step they have made a gift.
6. Payment Processor informs the merchant (that's us) of the result and either moves forward or if fraud prevention rules are in place, can use immediate preplanned decision logic, or can suspend the transaction for manual review before we accept the funds.
7. Clearing and settlement occur, ensuring the funds are transferred to the merchant's account based on the card issuer.
If transaction is suspended in step six and I go in and allow it in after the 31st (say 1/1 or 1/2) then I am still giving the donor December credit because that's when they surrendered the funds. I have had this happen in non calendar-year-end scenarios.
If clearing issues occur in step 7, like we've lost the transmission or some other issue that was not the fault of the donor, and we need to ask them to go in a do the transaction over. I would be inclined to give the donor 12/31 charitable contribution credit, treat the next attempt as a cash receipt, and use journal entries to reconcile between the two. I have not had this specific scenario happen. This is not unlike how we would treat a scenario where a donor sends us a check and we accidentally destroy it and ask them to send another but give the credit for the date of the destroyed check.
I don't see this as inconsistent with what the Pub 526 but if it is, I would love to know so that we handle correctly if the situation occurs. And of course, I am not a tech expert on payment processes and I don't know the details of the original issue so am not sure if this even applies.
In earlier exchanges, I was seeing some state the entire process needed to complete to establish a gift date (i.e. steps 1-7) and I am saying the donor is off the hook once they've surrendered the funds, regardless of how we fumble things from there.
Thanks,
John
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John Smilde
George Mason University Advancement
jsmilde@gmu.edu
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Original Message:
Sent: 01-07-2025 06:44 PM
From: John Taylor
Subject: Direct Debits Timeframe
John, the timing requires the bank to approve the transaction. Even if not rejected, until the bank approves the transaction it's not a gift. Here is confirmation from Crescendo: "Gifts by credit card are deductible in the year when the charges are made on the card owner's account."
John H. Taylor, PrincipalJohn H. Taylor Consulting, LLC
2604 Sevier Street
Durham, NC 27705
919.816.5903 (cell/text)
Serving the Advancement Community Since 1987
Original Message:
Sent: 1/7/2025 5:35:00 PM
From: John Smilde
Subject: RE: Direct Debits Timeframe
Original Message:
Sent: 1/7/2025 1:10:00 PM
From: Isaac Shalev
Subject: RE: Direct Debits Timeframe
Dariel and John, I think the timing turns on whether the transaction was rejected or not. If it was rejected, and the donor needed to resubmit it, the donation timing would be on the resubmit date. It doesn't matter why the transaction was rejected. If the donation was put in a pending or review status, and was eventually approved, it's still the same initial transaction. Even if the donor is asked by their bank if they recognize the charge, that wouldn't change the transaction date, they could still claim the deduction based on the earlier date, because the transaction wasn't declined, just put in a pending state to confirm the donor's original intent. The donor doesn't have control over the money -- to regain control they have to lie and claim the transaction was fraudulent.
Thank you,
Isaac Shalev
Data Strategy Expert
Sage70, Inc.
(917) 859-0151
isaac@sage70.com
Schedule a 30-minute consultation now:
Original Message:
Sent: 1/7/2025 12:54:00 PM
From: Dariel Dixon
Subject: RE: Direct Debits Timeframe
I think the way credit cards and direct debits are handled is part of the issue. Generally speaking, credit/debit cards are processed in real time, and authorization or error codes are displayed immediately. In my case, the direct debit likely failed in transmission resulting in neither an error or an authorization. To add insult to injury we lost the EFT transmission and don't have the ability to recreate it.
The way I understand credit card fraud is if there fraud detected on the issuing financial institution, and if it is detected on the receiving financial institution. In your example @John Smilde I think it is the latter. If the receiving financial institution suspects fraud, the funds are no longer within the control of the donor or their financial institution. The receiver has the control whether to accept the donation or to reject it, and I think that is the key point. If the donor was the decision maker on whether the transaction was approved or not, I could see the reasoning for not allowing the gift to be entered into the CRM with the original gift date.
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Dariel Dixon
Chautauqua Institution
ddixon@chq.org
Original Message:
Sent: 01-06-2025 02:41 PM
From: John Smilde
Subject: Direct Debits Timeframe
Curious if an additional nuance is worth considering for credit card gifts. The original question doesn't have specifics about the nature of the issue but there are two decisions that occur in card transactions. First the donor's bank or card issuer approves it and second the recipient accepts it. For example, we have some fraud detection decision logic built into our CC system that will flag and reject some transactions and suspend others until we approve it. These are based on some conditions we have set. It doesn't happen a lot but it does happen.
If, for example, the original question Dariel had a situation where their own gateway was being a little too aggressive and rejecting or suspending something until review, and that didn't happen until after calendar year end, would the donor be entitled to an old year receipt? They did their part and their bank or card issuer authorized it – and they surrendered control of the dollars since it was likely put on hold on their account pending a transaction settlement.
John Smilde
Director of Gifts and Records Administration
Advancement and Alumni Relations
George Mason University
4400 University Drive, MSN 1A3
Fairfax, VA 22030
703.993.8680
jsmilde@gmu.edu
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subject to exclusion from disclosure under the Freedom of Information Act pursuant to
§2.2-3705.4.7. of the Code of Virginia.
Original Message:
Sent: 1/6/2025 1:37:00 PM
From: Alan Hejnal
Subject: RE: Direct Debits Timeframe
As I understand matters, the tax code says that a contribution is made when it leaves the control of the donor. So, for example, since the USPS is considered the agent of the recipient, a gift by check has left the control of the donor when the check is mailed. For a credit card charge, the funds are not considered to have left the donor's control when the funds are withdrawn from the donor's account (which is better than the earlier analysis, the a credit card charge was borrowing money, so the gift was not made until the donor paid the credit card bill!).
Stock gifts are a little different, in that electronic stock gifts are not considered to have left the donor's control until the stock has been received by the recipient, rather than when the donor authorized the gift, since that is when the stock is considered to have left the control of the donor.
(There are special rules related to other provisions of the tax code, like the one that says that IRA required minimum distributions have to actually have left the IRA account by the end of the calendar year; that's not so much related to when the gift is made as it is to whether the IRA holder has made their distribution on time.)
Not sure about the sort of issue that you encountered, but the crux of the matter would be to determine when the funds left the control of the donor. On the credit card example, it would not surprise me that the funds are considered to be under the donor's control until the funds have left the donor's account.
My US$0.02 worth; the usual disclaimers apply.
Good luck!
Alan
Alan S. Hejnal (he/him)
Data Quality Manager
Original Message:
Sent: 1/6/2025 12:25:00 PM
From: Dariel Dixon
Subject: RE: Direct Debits Timeframe
I appreciate this insight. And I appreciate @Isaac Shalev for saying the quiet part out loud. This is an inconsistency as in this case the donor has proof of a donation that was attempted in the case of the electronic receipt. If these donors had written a check this would not have been an issue. We have not yet started contacting the donors as we just heard from the vendor, but this can help us know what we can and cannot say. While most of the gifts affected are small, we did have a gift of significant value that was involved. It was disappointing that the vendor was unable to help with any of these issues as well, but that's another post.
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Dariel Dixon
Chautauqua Institution
ddixon@chq.org
Original Message:
Sent: 01-06-2025 10:52 AM
From: Isaac Shalev
Subject: Direct Debits Timeframe
Normally, electronic transfers are deductible when they are authorized by the donor, but only if the transaction goes through. This is inconsistent with how the IRS treats checks - if a check was lost in the mail, the donor can write a new check and still take the deduction in the previous year, if they have evidence that they mailed the check in the previous year. Why are checks treated differently? Because. But it is unfortunately the case that electronic payments do not get the same grace. In any case, your receipt should not indicate when the donor can take the deduction. You may indicate the date the donor initiated payment originally if you wish, alongside the date you received and/or processed the donation. The donor and their CPA are responsible for when they time that deduction.
Thank you,
Isaac Shalev
Data Strategy Expert
Sage70, Inc.
(917) 859-0151
isaac@sage70.comSchedule a 30-minute consultation now:
Original Message:
Sent: 1/6/2025 10:53:00 AM
From: John Taylor
Subject: RE: Direct Debits Timeframe
While the situation is different, the IRS's stance is not. As the funds were not provided/charged in 2024, the donor cannot claim a 2024 deduction. Legally, the gift date is when the bank authorized the charge.
If the payment is small, you like;y do not have a donor relations issue. Only one in eleven taxpayers itemize as the standard deduction is so high.
John
John H. Taylor, PrincipalJohn H. Taylor Consulting, LLC
2604 Sevier Street
Durham, NC 27705
919.816.5903 (cell/text)
Serving the Advancement Community Since 1987
Original Message:
Sent: 1/6/2025 10:48:00 AM
From: Dariel Dixon
Subject: Direct Debits Timeframe
Howdy FUNDSVCS,
I have an unfortunate situation with a couple of direct debits that were made on NYE. Due to an error on our processor's side, we had some direct debits that were not processed correctly. We were just informed that the payments cannot be retried and that we would need to contact the donor to have them retry payment. Due to the issue with the payment processor, would we be able to attempt this payment again and attribute it to 2024, as that was when the original gift was attempted? I've reviewed @John Taylor's annual paper, but this situation is a bit different. In this case, an electronic receipt was generated at the time, so I'd assume they could use that to claim a deduction. However, since it wasn't debited correctly due to a vendor issue it puts the gift in a somewhat gray area.
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Dariel Dixon
Chautauqua Institution
ddixon@chq.org
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