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Charity Scam, Bankruptcy Rules, Tax-Exempt Penalties

Saul Brenner, CPA, J.D., LL.M. 08.03.2016 | eVisor

Orlando Massacre May Trigger Charity Scams

The IRS is alerting taxpayers of the potential for charity scams emerging from the recent mass murder in Orlando.  Scammers are looking to take advantage of the good intentions of individuals seeking to make donations to assist victims. Taxpayers are warned that they may be approached via telephone, social media, email, or in-person.

The Service has provided these tips to help ensure that your donations go to genuine charitable organizations.

aDonate only to recognized charities.

  • Be alert to charities with names that seem familiar or sound like nationally known, legitimate organizations. This is a common ploy by scammers skilled at developing whole websites that mimic familiar charities or claim to be affiliated with these charities. IRS.gov has a search feature, Exempt Organizations Select Check, where you can find qualified charities.  Your donations to these organizations may be tax-deductible.
  • Do not supply personal financial information - Social Security numbers, credit card numbers, bank account information, or any associated passwords. This can lead to identity theft.
  • Avoid giving cash. For both security and tax record purposes, donate by check or credit card. This gives you documentation of your gift.
  • The IRS offers a free booklet, IRS Publication 526, Charitable Contributions, available on IRS.gov. that describes the tax rules for making tax-deductible donations.

If you suspect fraud from an email solicitation, visit IRS.gov and search for the keywords Report Phishing.

Clarity on Cancellation of Debt Rules

The IRS has finalized regulations1 for determining who is the "taxpayer" in applying the insolvency and bankruptcy exceptions to discharge-of-indebtedness rules to a grantor trust or disregarded entity. A disregarded entity is a business entity that elects to be disregarded as separate from the business owner for federal tax purposes.

Internal Revenue Code Sections 108 (a) (1) (A) and (B) exclude discharged debt from a taxpayer's income if the discharge occured in a bankruptcy case or to the extent the taxpayer is insolvent when the discharge occurs. The regulations provide that, for a grantor trust or a disregarded entity, the "taxpayer" means the owner of the grantor trust or disregarded entity and not the trust or entity itself. In the case of partnerships, the owner rules apply to the partners to whom the discharge-of-indebtedness income is allocated. If any partner is itself a grantor trust or a disregarded entity, the rules require that ultimate owner of the partner be identified and would be the taxpayer.

The final regulations emphasize that case law treating the partnership as the party whose bankruptcy is relevant 2 have not been adopted by the IRS. The regulations clarify that the insolvency exception is available only if the owner is insolvent. The insolvency of the grantor trust or the disregarded entity is not taken into account.

T.D. 9771

Gracia, T.C. Memo. 2004-147

IRS Changing the Way it Examines Tax-Exempts - Penalties Expected to Rise

It appears that the IRS has been increasing the number of audits it is conducting of tax-exempt organizations and is more likely to assess penalties.

The IRS Tax-Exempt and Government Entities Division is employing a case selection model that uses Form 990 and its supplementary forms and schedules to identify potential noncompliance issues.  The model is designed to weigh multiple factors in the search for specific areas where the tax-exempt may be at risk. These areas can include private inurement and excess benefit transactions. Going further, the IRS is reviewing online comments and complaints about tax-exempts and monitoring press reports.

Questions? Contact your Berdon advisor or Saul Brenner, CPA, J.D., LL.M. Berdon LLP, New York Accountants  

 

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