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Charity Fraud Makes the IRS’ “Dirty Dozen” Scams List

(March 19, 2007) The Internal Revenue Service (IRS) has identified 12 of the most blatant scams affecting American taxpayers, and charity fraud has made the list again.

The IRS releases the “Dirty Dozen” list annually, and at number 10 this year is “Abuse of Charitable Organizations and Deductions.” The IRS notes that:

"The IRS continues to observe the use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income. Contributions of noncash assets continue to be an area of abuse, especially with regard to overvaluation of contributed property. In addition, the IRS is noticing the return of private tuition payments being disguised as charitable contributions to religious organizations."

AFP will look to obtain more information about the IRS’ data. AFP, in the past, has supported the tightening of rules governing supporting organizations and donor-advised funds. The IRS has already announced it is conducting a study of donor-advised funds and has asked for public input.

The Dirty Dozen list contains such scams as telephone excise tax refund abuses, abusive Roth IRAs, phishing and disguised corporate ownership. The full list is available on the IRS website.

Senate Prodding IRS

The Senate Finance Committee has indicated it will continue its investigation of the nonprofit sector and has asked the IRS for more information on tax avoidance schemes involving nonprofits, according to Reuters News Service.

“We want to know about tax avoidance scams that are hurting America's ability to fund important priorities like health care and education,” said Sen. Max Baucus (D-Mont.) in a statement. “We need to seek out and stop those who are hiding behind tax-exempt status for their own gain, in order to protect the vast majority of tax-exempt organizations that are doing so much good.”

Such requests for information are often a sign of upcoming legislative action, including the introduction of additional reform bills. Over the past several years, AFP and other nonprofits have helped defeat several reform proposals that would have affected the ability of charities to raise funds.

Charity Fraud Still Rare

Past empirical data has indicated that there is not widespread abuse among charitable organizations. Reports collected by the Federal Bureau of Investigation (FBI), the Federal Trade Commission (FTC), state attorneys general and even watchdog groups such as the Better Business Bureau had indicated that reports of charity fraud constitute less than 1 percent of all complaints of fraud.

In the rare cases of abuses, better enforcement of existing laws most likely would have prevented those abuses. A recent study found that, of the 94 abuses cited by the Senate Finance Committee during its June 2004 hearing on charity oversight, 92 of them could have been addressed by increased enforcement of current laws, regulations and reporting requirements.

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