Tax cheaters will try anything.
"There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government."
Here are a few charitable deduction scams that the IRS and Justice Department officials have been focusing on:
• Kickbacks. A charity solicits donations. It asks for a very big donation, and then secretly promises a refund. The donor takes an income tax deduction for the big donation, gets a tax benefit, and then the charity gets gives back a big portion of the donation. The result – the charity gets a donation, the donor gets a big tax deduction but gets most of his money back. The U.S. Treasury is left holding the bag. On June 16, 2008 the Wall Street Journal reported on such a scam carried on by the Spinka religious group where up to 95% of the "contributions" were returned to the donors. Three participants have pled guilty, but several more participants and leaders of five charitable organizations will go to trial later this year. One "donor" who pled guilty will pay more than $1.5 million in back taxes. The investigation continues, and the IRS expects to find more than 100 "donors."
This is a large scale version of the fraud where a person puts a check for $100 into the collection plate, takes out $90 in change, then deducts the whole $100.
• Big game scam. Treasury has cracked down on the trophy hunting industry. Hunters were writing off the cost of hunting vacations by engineering charitable deductions for the donation of their skinned or mounted "trophies" to a charity. The charitable deduction of a grossly over-appraised donation was often enough to cover the cost of the hunting trip.
• Professional preparers. Government officials have been cracking down on professional tax return preparers who make up phony charitable deductions. These preparers curry favor with their clients claiming to get them bigger refunds or lower tax bills – because of the inflated and fraudulent charitable deductions or other scams.
Tom Herman, writing for the Wall Street Journal, warns: Beware of anyone who bases his or her fee on the size of your refund, or who promises a bigger refund than anyone else, or who prepares your return but refuses to sign it. Also, never, ever, sign a blank return.
• CEO gifts of stock. Dave Yermack’s study of CEOs who make large gifts of stock found that they tend to make large gifts of stock right before the price falls. This uncanny coincidence leads him to surmise that these gifts are back-dated. In his study he reports that "[t]ests used to infer the backdating of executive stock option awards yield results consistent with the backdating of CEO family foundation stock gifts." at inflated values (with the collusion of the museums) for inflated tax deductions.
• Fake churches. Some individuals declare their home a church and that they are clergy (with a mail-order ordination) for that church. This involves not only income tax fraud, but also an attempt to get exemption from real estate taxes. Usually the officers and members of the church are just family members. The "minister’s" income is claimed to be the church’s income and, therefore, tax exempt.
• Disguised payments. According to the IRS, there has been a marked increase in the number of instances where taxpayers have taken charitable deductions for tuition payments. When tuition is paid to a private school that is run by a religious organization or other non-profit, the check may only have the name of the non-profit on it as the payee. These taxpayers try to get away with reporting these fees for service as charitable donations.
• Overvaluations. There is much abuse in the area of charitable gifts of tangible personal property. This ranges from large scale fraud on the valuation of artwork, to over-valuing the bags of used clothing you give away. Shares of stock in the family business given to charity are also targeted for investigation for over-valuation, as are transfers of interests in real estate.
• Abuse of Supporting Organizations. A taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income – thus keeping the benefit of the asset but simultaneously taking an income tax deduction for a charitable contribution.