The IRS has found that tax evasion is rampant in nonprofits. Because of this, the IRS has generated a list of some common tax evasion scams. As a donor, you should be concerned if your donation to a 501(c)(3) organization is being spent on the organization’s stated exempt purpose.
Some Common Scams Include:
Unrelated Business Income Tax – According to the IRS, a tax-exempt organization is subject to unrelated business income taxes when the income generating activity is (a) not substantially related to the organization’s charitable purpose, (b) is regularly carried on, both in frequency and continuity, and (c) constitutes a trade or business. All three must be met in order for the organization to be taxed.
Tax Evasion through a Nonprofit – The donor gives money to a tax-exempt organization that is usually created by the donor and then gets the supposed donation back, tax-free, through offshore investments or interest-free loans to family, who eventually return the funds to the original donor. An individual’s taxable income is laundered through the tax-exempt charity so that the donor can avoid paying taxes on their income.
Misappropriated Donations – Many don't seem to check to see if nonprofits are really spending donations on their purported charitable purposes or any charitable purpose at all.
Noncash Assets Donated – Assets (private securities or land are just two examples) are donated to charity and the taxpayer inflates the value of the asset and in turn their tax deduction. How the laws are written do not incentivize charities to challenge the inflated value.
Just like the other issues I have discussed in my previous nonprofit ethics blogs, tax evasion causes a loss of faith in the nonprofit sector. The tax benefits extended to charities requires the organization to achieve their intended results.
As Senator Charles Grassley of Iowa once stated "In exchange for these very generous tax breaks, charitable assets should be going to those in need. More and more, we're seeing that some people view charities and charitable gifts as a chance to help themselves, not others.”
To conclude, there is a very good resource available. The Independent Sector brought together twenty-five nonprofit leaders to establish Principles for Good Governance and Ethical Practice – A Guide for Charities and Foundations. It is designed to guide board members and staff leaders of every charitable organization as they work to improve their operations.