February 16, 2012; Source: Internal Revenue Service | Annually, the IRS warns the public of 12 typical tax scams to watch out for. This year’s “Dirty Dozen” ranking of tax scams features one ploy specifically directed at nonprofits. In one brief paragraph titled, “Abuse of Charitable Organizations and Deductions,” the IRS warns taxpayers about using purported charities simply to “improperly shield income or assets from taxation.” The Service also warns against “schemes that involve the donation of non-cash assets.” Sometimes, such assets are overvalued by both donor and done. In other cases, donations could be made with problematic secret provisions allowing the donor to buy back the asset at a predetermined price. The IRS also cautions against arrangements in which several organizations “claim the full value of the same non-cash contribution.” The section of the report dealing with nonprofits reads, in full:
IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.
Another of the dozen scams might also be applicable to nonprofits, particularly those foundations investing in off-shore accounts. The tax return tribulations of Republican presidential candidate Mitt Romney revealed that his low federal taxes were partially due to his use of overseas tax havens. This practice is hardly unknown in philanthropic circles, surfacing most recently with the revelation of hundreds of millions of dollars of off-shore investments made by New York City Mayor Michael Bloomberg’s family foundation. The Obama Administration is supporting the reopening of the Offshore Voluntary Disclosure Program (OVDP), an IRS effort to get individual taxpayers to bring their money back to the U.S. That might be an objective for charitable foundations as well as for individuals, with the notion that foundation investments might be better off if made in Kansas City rather than the Cayman Islands.—Rick Cohen