Many of these schemes involve false charitable donations
of ConsumerAffairsScams are a threat all year round, but in December, as many people plan end-of-the-year charitable contributions, theres usually an increase in scams that take advantage of good intentions. One scheme in particular could also land the donor in trouble.
The IRS is warning taxpayers to be aware of fraudulent tax schemes involving donations of ownership interests in closely held businesses, often marketed as "charitable LLCs." These schemes, which primarily target higher-income individuals, are deemed abusive transactions by the IRS and can lead to severe financial and legal consequences.
The IRS emphasizes that taxpayers are ultimately responsible for the accuracy of their tax returns. Engaging in these schemes to reduce tax liability can result in the assessment of the correct tax owed, along with penalties, interest, and potential fines and imprisonment. Charities are also cautioned against inadvertently enabling these schemes.
While legitimate deductions for donations of closely held business interests are permissible, unscrupulous promoters sometimes lure taxpayers into schemes involving false charitable deductions. These schemes typically involve creating limited liability companies (LLCs), transferring assets into them, and then donating a majority percentage of nonvoting, non-managing membership units to a charity.
Meanwhile, the taxpayer retains control of the voting units and can reclaim the assets for personal use. In some cases, promoters may even control the charity receiving the donation.
The IRS is actively investigating these abusive transactions using a variety of compliance tools, including thorough audits and civil penalty investigations. The IRS says hundreds of tax returns have been filed using this scheme, leading to criminal convictions, including a promoter pleading guilty and a donor convicted of obstruction.
Red flags
To avoid penalties and potential legal repercussions, the IRS advises taxpayers to be vigilant against abusive transactions marketed by unscrupulous promoters. Key red flags include promises of personal benefits beyond tax deductions, transactions involving the creation of entities solely for donations, and arrangements allowing personal use of donated assets.
Properly claiming a charitable contribution deduction for a donation of a closely held business interest requires meticulous record-keeping. Taxpayers must document the name and address of the charitable organization, the date of the contribution, and a detailed description of the business interest.
Additional requirements vary based on the value of the claimed deduction, including obtaining written acknowledgments, completing specific IRS forms, and securing qualified appraisals for larger donations.
Photo Credit: Consumer Affairs News Department Images
Posted: 2024-12-16 23:53:22
