Our friends at the Internal Revenue Service have released their annual “Dirty Dozen” list, which they say shows “the worst of the worst tax scams.”
While the list does include some tax scams you probably expect, such as identity theft, telephone scams and email phishing, the first two items on this year’s list focus on gifts to charity! Let’s talk about what these scams are and how you can protect yourself.
Gifts to fake charities
Topping this year’s list is one that is particularly heartbreaking: scammers who set up fake charities to accept donations from well-meaning people. The scammer will solicit donations to their “charity” and promise a tax deduction in return for the contribution. This type of scam can become more common in the wake of a significant natural disaster, such as a wildfire or hurricane.
This is a scam on two fronts. First, the money donated to the fake charity often does not go to the project that was promised. The scammers simply take the money (for themselves) and run. The taxpayer loses that money, and might not even realize the good work they intended to support didn’t actually happen.
The second wave of the scam comes at tax time, when the taxpayer tries to report their gift to the fake charity as a deductible charitable contribution on their tax return. Because the contribution wasn’t made to a qualified charity, it’s not deductible. And even worse, reporting it could result in penalties for the taxpayer!
Here are some tips to protect yourself from this type of scam:
— If you’re contacted by someone you don’t know who says they are a representative of a charity, do not provide any personal information over the phone, such as credit card numbers or social security numbers. Instead, hang up and initiate your own call to the charity using the phone number you already have. This ensures you are talking to a real representative of your chosen charity.
— If you are approached by a charity you don’t know, you can investigate their credentials on the IRS website.
— Beware of charities and websites with names similar to those of reputable charities. Scammers will sometimes try to trick you by making very close copies of existing sites.
— When you want to help in a time of need, turn to a charity like Plan International USA that you already know and trust. We’ve earned GlobalGiving Leader Status on Charity Navigator, we’re one of Great Nonprofits’ Top-Rated Nonprofits and we are a Better Business Bureau accredited charity.
— Make your gifts through your charity’s secure online donation form. For example, you can make secure gifts to Plan on our website.
Above all, if you are contacted by someone who claims to represent Plan and you are unsure, please contact us so we can help.
Inflated charitable deductions
The other scam you should know about involves reporting charitable deductions for an incorrect amount. This can happen when a taxpayer “pads” their deduction amounts intentionally, or is simply “generous” in the valuation of their deductible gifts. However, inflated deductions can also be added by tax preparers, unscrupulous or not, in an effort to get the best tax outcome for their clients.
As I mentioned before, reporting an improper deduction can result in penalties and fines to the taxpayer, even if the return was prepared by a paid tax preparer. Remember, you are ultimately responsible for whatever information is reported on your tax return. The paid tax preparer is not the one who will be paying the penalty!
Here are some tips to avoid inflated deduction amounts:
— Know your tax preparer. If you do not prepare your return yourself, make sure you have a reputable tax preparer working for you.
— Whenever possible, make your contributions from assets that are easily and accurately valued. Gifts of cash and stock have values that are straightforward, while a gift of a painting or automobile may not. Making your gift by check or credit card also gives you an easy way to keep a record of your giving.
— Talk to your tax adviser before you make your charitable gift to be sure your gift meets all of the requirements of the tax deduction you intend to claim later. Depending on your situation and the size of your gift, you may want to consult your accountant, financial planner and/or attorney in the process.
— If you are contemplating a charitable gift to Plan in order to maximize your tax deductions, contact me. I am here to help you structure your gift in the way that is best for you, and to work with your tax advisers to make your gift a reality.
— If you do not have a tax preparer and feel you cannot afford one, you may qualify for assistance through the IRS’s Volunteer Income Tax Assistance program (VITA). I was a VITA volunteer while I was in law school. It’s a great option for those who need assistance!
A little caution can go a long way toward ensuring your charitable deductions go exactly where you intend. When you’re giving to Plan, we’re here to help! Please don’t hesitate to reach out.
Happy Tax Season!