Refunded donations can be tracked in one of two ways: modifying the original donation record or adding a negative donation amount in a separate record.
In our opinion, the best way is to go back and modify or remove the original donation record. For any record keeping, the Notes tab would be the proper place for a detailed note explaining the situation. If the Comment field on the donation tab is not being used for something else, you could use this field to make small notations as well if the record is not deleted entirely. This method will make sure the donor is accurately acknowledged for the tax deductible donation that they may be eligible for.
If you choose to use the negative donation route, you may run into problems with the calculated Tax Deductible Amount field when generating Contribution Statements. If you use the bulk creation tool found under Reports > Donation Activity > Contribution Statements, the Tax Deductible Amount field will not consider negative donation amounts in the calculations. This may lead to reporting a higher Tax Deductible Amount than your donor is eligible for. If you need to run a contribution statement that includes negative donation amounts in the tax deductible amount calculation, you will need to run the statement individually by going to Community > Contacts. Select the contact, and move to the Donation tab. At the bottom, click the Contribution Statement button. This version of the tool will accommodate you by factoring negative donations into the tax deductible amount calculation.