The IRS has issued a warning about a new tax avoidance scheme targeting business owners and other high-income taxpayers. Scammers are exploiting taxpayers' desire to maximize charitable giving benefits by convincing them to establish their own charitable limited liability companies (LLCs). This scheme, while appearing legitimate, is illegal and could lead to severe penalties.
The Scheme Unveiled
Scammers are promoting the idea that taxpayers can set up charitable LLCs and then claim inflated or fraudulent charitable donations for contributions of non-voting ownership interests in businesses. Alternatively, cash may be contributed to a charitable LLC and either loaned back to the donor or used to purchase life insurance for the donor or his/her family. Promoters of these scams promise participants significant tax savings and may offer assistance with setting up the entities, preparing tax filings, and drafting false documentation.
However, the deductions claimed using these schemes generally lack a charitable purpose, may be overvalued, and/or omit the necessary substantiation required under IRS regulations. In most cases, the assets or funds intended for charitable purposes will never reach legitimate charitable organizations.
For more information on the charitable LLC scam, please visit https://www.irs.gov/newsroom/irs-alert-charitable-contribution-scams-on-the-rise-taxpayers-beware-of-those-promoting-fraudulent-schemes
IRS Enforcement and Penalties
The IRS is actively investigating this and other tax schemes, while also reminding taxpayers of the consequences of participating in abusive or illegal tax avoidance strategies. Penalties may include:
Fines: Participants may face significant financial penalties, including the repayment of taxes owed, interest, and additional penalties for negligence or fraud.
Criminal Charges: In egregious cases, taxpayers may face criminal charges for willful participation in tax evasion schemes.
Protecting Yourself from Scams
To avoid falling victim to such schemes:
Consult Trusted Professionals: Work with reputable tax advisors or attorneys to plan your charitable giving and ensure compliance with IRS guidelines.
Verify Charitable Organizations: Confirm the legitimacy of any charitable entities you plan to support using the IRS Tax Exempt Organization Search tool at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search
Understand Your Responsibilities for Documenting Charitable Deductions: Familiarize yourself with IRS rules for charitable deductions (see IRS Publication 526.) General substantiation requirements, based on the value of the claimed deduction, include the following:
For donations of:
$250 or more, the taxpayer must obtain a written (paper or electronic) acknowledgement of the contribution from the charitable organization. Taxpayers need to have that documentation before they file a tax return for the taxable year in which they made the contribution.
More than $500 but not over $5,000, the taxpayer must also complete Form 8283, Noncash Charitable Contributions, Section A, and attach it to their tax return.
More than $5,000, the taxpayer must obtain a qualified appraisal of the donated property and complete Form 8283, Section B, including the signature(s) of the qualified appraiser(s) and the charity.
$500,000 or more, the taxpayer must do all of the above and attach a complete copy of the qualified appraisal to their tax return.
Report Suspicious Activity: If you encounter questionable tax strategies or suspect a scam, please see https://www.irs.gov/help/tax-scams/report-a-tax-scam-or-fraud for how to report it.