October 16, 2003 | Read Time: 2 minutes
By Elizabeth Schwinn
As part of its work plan for the fiscal year that began October 1, the Internal Revenue Service said it will focus attention on charities that are used by individuals to evade income and other taxes, and on political groups registered under Section 527 of the Internal Revenue Code.
Among the charities that some people are using to evade taxes are donor-advised funds and supporting organizations, according to Steven T. Miller, IRS exempt organizations director. Mr. Miller said that the vast majority of such groups are legitimate, but a few “outliers” break tax laws.
Donor-advised funds allow people to donate cash, stock, or other assets to special accounts, claim a charitable deduction on their federal income taxes, and then recommend how, when, and to which charities the money in the account should be distributed.
Abusive transactions appear to follow one of three patterns, said Mr. Miller:
- Tax-deductible dollars are channeled through a tax-exempt organization to pay for personal items, such as a child’s private-school tuition.
- Income or appreciated assets are inappropriately sheltered from taxes in a nonprofit organization.
- A tax-exempt organization is used to allow a donor to inappropriately accelerate deductions for business expenses.
When it reviews political nonprofit groups, Mr. Miller said that the IRS will make sure that Section 527 organizations are complying with filing requirements, and may audit some of them. Such tax-exempt lobbying groups are named for the section of the tax code under which they are organized and enjoy tax benefits with fewer restrictions on political activity than political organizations formed under other sections of the code.
In a related move, the IRS outlined the latest phase of its program to study particular types of charities with the aim of strengthening its audit program. Next year, the agency expects to examine fund-raising organizations, such as United Ways. It also will review private schools and certain kinds of charitable trusts, such as charitable remainder trusts. In a typical charitable remainder trust, a donor contributes cash, stock, or some other asset to the trust, which makes regular payments to the donor. When the donor dies, any remaining trust assets go to charity.
The IRS said it is trying to build “profiles” of the types of organizations that auditors could use to identify areas in which tax-law violations are likely to occur. The tax agency has divided the nonprofit world into 35 separate categories to be surveyed. The first studies, on social clubs and labor groups, are due to be released next year.
The complete IRS work plan may be found online at http://www.irs.gov/pub/irs-tege/eowrkpln_04.pdf.
