Panel Recommends Review of Tax Shelters
June 26, 2003 | Read Time: 2 minutes
In response to concern that tax-exempt organizations are being used as illegal tax shelters, an Internal Revenue Service advisory committee has recommended the creation of two new offices to tackle the problem.
The committee cited two examples of abuses of charitable-giving laws: car donations by donors who claim an exaggerated value for the vehicle; and certain types of charitable remainder trusts by donors who take a charitable deduction on their income taxes for money that is not being used for charitable purposes.
The IRS has recently issued guidance for charities on car donations, but observers are concerned the agency is spread too thin to handle the issue effectively.
The committee, known as the Advisory Committee on Tax-Exempt and Government Entities, did not identify the type of trusts. Two that emerged in the 1990s — “split dollar” and “chutzpah” trusts — have been outlawed. But some observers worry that new types of tax shelters will be introduced as financial-service companies scour the federal tax code for ways tax breaks intended to encourage charitable giving can be used to the maximum financial gain of their wealthy clients.
Through a charitable remainder trust, a donor gives cash, stock, real estate, or other assets to a charity, which then sets up a trust by investing the gift. In exchange, the charity provides regular payments to the donor, a beneficiary, or both. After the donor and any beneficiaries die, the charity receives control of all remaining assets.
The IRS’s concern is that charitable remainder trusts may sometimes be abused by donors who get too great a financial benefit from the arrangements. With split-dollar trusts, donors essentially sheltered premium payments on life-insurance policies from taxes by donating money to a charity and then having the charity make the policy payments. The chutzpah trust used complicated borrowing and investing techniques to help wealthy donors reduce capital-gains taxes on highly appreciated assets.
The committee said that because the IRS’s nonprofit division lacks expertise in prosecuting tax-shelter fraud, it needs an office through which its auditors and managers can pool resources to crack down on abuses of tax laws.
The committee also recommended creating a separate office to collect information from various parts of the service that it could use to teach charities how to make sure they are not enaged in any fund-raising activities that violate federal tax laws.
