IRS Continues to Target Charitable Donation Fraud While Warning of Fake Charity Scams
November 23, 2023
Charitable donations offer the opportunity to achieve significant tax savings while helping to support valuable causes throughout the United States and around the world. Charitable giving is a key component of most high-income and high-net-worth tax planning strategies, and the Internal Revenue Code expressly allows taxpayers to deduct a percentage of their contributions to qualifying charitable organizations annually.
But, the Internal Revenue Service (IRS) also pays close attention to taxpayers’ charitable deductions—particularly in the upper echelons of the income spectrum. It has been cracking down on charitable deduction-related tax fraud in recent years, and charitable contribution schemes are a perennial inclusion on the IRS’ “Dirty Dozen” list of tax scams.
This is true even though the IRS is now warning high-income and high-net-worth taxpayers to be on the lookout for fake charity scams. As the IRS wrote on October 23, 2023, “[w]hen fake charities scam unsuspecting donors, the proceeds don’t go to those who need the help and those contributing to these fake charities can’t deduct their donations on their tax return.” When taxpayers fall victim to these scams, they are not entitled to the tax benefits of donating—and if they have claimed deductions, they must promptly amend (or otherwise address) their inaccurate filings.
Defending Charitable Contribution Deductions During an IRS Audit or IRS CI Investigation
With the IRS cracking down on charitable donation fraud, many high-income and high-net-worth taxpayers are facing scrutiny not only from the IRS but also from IRS Criminal Investigation (IRS CI). IRS CI conducts extensive and invasive investigations focused on uncovering evidence of intentional tax evasion, tax fraud and other crimes. Of course, the fact that the IRS or IRS CI is looking into a taxpayer’s returns does not necessarily mean that the taxpayer’s returns are fraudulent. Taxpayers targeted in audits and investigations will have strong defenses in many cases—and asserting these defenses effectively will be the key to avoiding unnecessary liability.
Here are some examples of potential allegations—and potential defense strategies—in cases involving suspect charitable contribution deductions:
Abusive Transactions Involving Charitable Remainder Annuity Trusts (CARTs)
Charitable remainder annuity trusts (CARTs) allow taxpayers to donate assets to charity while still generating income over their lifetime or for a period of years. While there is nothing inherently lawful about using a CART for tax planning purposes, the IRS has singled out CARTs as potential vehicles for fraud. As the agency explains:
“In abusive transactions . . . property with a fair market value in excess of its basis is transferred to a CRAT. Taxpayers may wrongly claim the transfer of the property to the CRAT results in an increase in basis to fair market value as if the property had been sold to the trust. The CRAT then sells the property but does not recognize gain due to the claimed step-up in basis. . . . By misapplying the rules under sections 72 and 664, the taxpayer . . . treats the remaining payment as an excluded portion representing a return of investment for which no tax is due.”
There are several potential defenses to allegations of using CARTs to engage in tax fraud. Oftentimes, the complexity of these arrangements alone will be enough to trigger scrutiny from the IRS or IRS CI. By demonstrating that a CART fully complies with Section 72, Section 664 and all other relevant provisions of the Internal Revenue Code despite the IRS’ concerns, taxpayers will be able to withstand scrutiny in many cases.
Abusive Syndicated Conservation Easements
The IRS has recently proposed new regulations focused on combating fraud involving syndicated conservation easements. Similar to CARTS, syndicated conservation easements are effective tools for minimizing taxpayers’ liability through charitable contributions—and they are also red flags for the IRS. Once again, there are no inherent issues with using these tools for tax mitigation purposes, but scams have brought them onto the IRS’ radar.
Here, too, defending against fraud allegations is often a matter of affirmatively demonstrating compliance. In many cases, the IRS simply doesn’t have the information it needs to accurately assess whether taxpayers have complied with the Internal Revenue Code. However, for taxpayers who have fallen victim to syndicated conservation easement scams, asserting a successful defense may instead be a matter of demonstrating non-willfulness while simultaneously working with the IRS to resolve their tax deficiencies.
Donating to Non-Qualifying Organizations
Charitable donations are only tax-deductible when they are made to qualifying organizations. If a taxpayer makes a donation to a non-qualifying organization—even if the taxpayer got scammed—the taxpayer cannot legally deduct its donation.
When taxpayers donate to non-qualifying organizations, their defense options may be fairly limited. However, there are options available, and experienced tax counsel should be able to help taxpayers mitigate their liability in these circumstances.
Falsifying Contributions or Exceeding the Percentage Limit on Charitable Contribution Deductions
As a general rule, charitable contribution deductions are limited to 60 percent of a taxpayer’s adjusted gross income for cash gifts. If a taxpayer’s deductions exceed this limit (or any other limit that applies), then the taxpayer may be liable for back taxes, interest and civil penalties—and the taxpayer could face criminal allegations if the excessive deductions appear to be part of an intentional tax evasion scheme. Accusations of falsifying charitable contributions will frequently lead to criminal allegations as well.
As with the other scenarios discussed above, determining what defenses a taxpayer has in these scenarios requires a careful assessment of the facts at hand. In some cases, taxpayers will have complete defenses to liability. In others, they will need to consider alternatives such as negotiating a settlement or, if it isn’t too late, submitting a voluntary disclosure. As with all high-stakes tax matters, informed decision-making is key, and taxpayers should engage experienced tax counsel promptly if they have questions or concerns.
Contact Brown Tax, P.C. in Fort Worth, TX
If you have concerns about facing IRS (or IRS CI) scrutiny related to significant charitable contribution deductions, we encourage you to get in touch. To request an appointment with a federal tax attorney at Brown Tax, P.C., please call 888-870-0025 or contact us confidentially online today.