Charity scams: Here's what to avoid

The holiday season is a time for giving, not just presents and gifts, but donations to charities too.

For some nonprofit groups, the period between Thanksgiving and New Year's day is their busiest, with as much as half their total donations coming in during the period, according to Charity Navigator, a nonprofit company that evaluates charities.

And scammers hope to make it a busy time as well.


Make sure you don't fall prey to fake Santa letter scam
"Whenever we see a large amount of money flowing to charities, there is going to be an increase in scammers," said Sandra Miniutti, chief financial officer and vice president of marketing at Glen Rock-based Charity Navigator. "When we see money change hands, definitely scammers come out of the woodwork."

People know what can happen. Using a pickup truck painted with 9/11 themes, Mark Niemczyk of Tinton Falls and Thomas Scalgione of Stafford raised about $120,000 which they claimed would benefit families of victims of the Sept. 11, 2001, terrorist attacks and charities. Instead, the money went into Niemczyk's bank account, prosecutors said.

So what are we to do to make sure our hard-earned money goes into the hands of people who will care for it and use it to benefit others?

 Donate with your heart, but take the time to check things out.


Check before you donate

•Make sure the group is a tax-exempt organization. If you decide to donate, and deduct the amount from your taxes, make sure you get a letter from the group thanking you for your donation, Both said. A canceled check is not enough proof that you donated, she said.

•Be wary of telephone solicitations. Even if a legitimate charity is behind the appeal, most of them use for-profit firms to make the calls, Miniutti said. Their fees may eat up more than 80 percent of your donation. "It may be risky for donors in general," she said.

•Check out a charity's financial health. A charity is required to give a copy of its Form 990, an annual disclosure to the Internal Revenue Service, for the last three years if you ask or they can be found online.

You can find out how much of the charity's donations are spent on programs as opposed to on expenses. A good benchmark: 75 percent on programs and 25 percent on overhead, Miniutti said. "You don't want to invest in a charity that will give you 25 percent on programs," she added.

•Examine the rest of the Form 990. For instance, it will tell you whether it has at least five independent board members, which can prevent unethical behavior. Is the chief executive of the organization reporting to her husband who sits on the board along with her daughter and her son-in-law? If the charity gives out grants, you can see where the money went, she said. "It starts to paint a picture."

•Ask questions. Charities should love to talk about themselves and their work. "If they are backpedaling and don't want to give you information, that is a definite red flag," Miniutti said.

•Look at the charity's website to see the impact of their work. "If you give locally, you can volunteer and actually visit the organization in action," Miniutti said.


•Look out for buzz words like "firefighter" when you're being pitched for donations. On Tuesday, the Toms River Fire Department said simply having the word "firefighter" in an organization's name doesn't mean firefighters are in the group. Even if a group has ties to local firefighters, it doesn't mean it will use contributions locally or for public safety, the department said.

"Be proactive and look for charities that match your passion and do good work and stick with them over time," Miniutti said.

Charitable organizations not all equal

With the holiday season in full swing, many charitable organizations are relying on a spirit of generosity as they ramp up their fundraising efforts.

The season can also provide opportunities for the unscrupulous, according to the Oregon Attorney General’s Office, from outright scammers to legitimate organizations that fail to provide much bang for each donated buck

The AG’s office released its annual “worst charities” list Friday, a document that relies largely on an IRS filing called a 990. Every year, nonprofits are required to file a 990, detailing how much money the organization takes in, how it’s spent and how much directors and other key personnel are paid.

The 20 charities on the AG’s list, all of which are based outside of Oregon, are notable for their use of professional fundraising firms, which eat up much of the money contributed by donors.

The “worst” organization on the list, the Firefighters Support Foundation based in Greenfield, Massachusetts, spent just 6.5 percent of the $3.93 million collected in 2013 supporting firefighters, according to the calculations of the AG’s office. The group’s 2013 form 990 shows different revenue numbers, $4.15 million in revenue, but the same 6.5 percent spent on firefighters, and $3.73 million — 89.9 percent — spent on fundraising.

A review of 990s filed by the largest charitable and educational organizations based in Central Oregon showed very different practices, with most spending upwards of 80 percent of revenues on their expressed purpose, according to their most recent filings.

Of the 15 largest charitable and educational nonprofits in Central Oregon, none reported spending any money on outside fundraising firms.

Ellen Klem with the Attorney General’s Office said although 990s are an important insight into how nonprofits operate, they often fail to tell the whole story. Organizations will sometimes see their revenues and expenditures out of balance for a year or two for good reason.

“Over the years, things will change,” she said. “One year, a nonprofit might want to be saving a little bit more, say for buying a building. You might see various expenditures, and the very next year when they buy the building, things would be very different.”

Kate Medema, with the AG’s charitable giving donations division, said as a general rule, donors are better off giving to organizations that have a presence in their local community. It’s easier for donors to independently verify that such groups actually do what they claim to do, she said, or to contribute volunteer time instead of money.

Medema said a few minutes of research, including a visit to the AG’s online charities database, can often identify which charities fall short of their expressed goals. She said while there are legitimate charities that rely on direct mail and phone solicitation to raise money, Oregonians should be wary of giving to groups they’re unfamiliar with.

“If you get a phone call, a piece of mail, somebody comes to your door out of the blue, you should be suspicious,” she said.

In 2013, the Oregon Legislature passed a law eliminating state and local tax deductions for donations to charities that spend less than 30 percent of their revenue on their mission. Medema said over time the law should help weed out bad actors.

“Oregon is incredibly aggressive when it comes to enforcing these laws. We want donors to be informed and to know that the organizations they’re giving to are going to be using their money wisely,” she said.

Check out charities before donating to them

FROM DALLASNEWS.COM

The holiday season beckons us to show others extra-special kindness, especially when it comes to organizations that help the less fortunate.

You can tell by the appeals from charities in your mailbox. The sheer volume received around Christmas means that consumers have to figure out how to divvy up their limited charity dollars.

But it’s because this season evokes emotion that you can’t let down your guard when it comes to those who tug at your heartstrings for your charitable donations.

Why do appeals increase at year-end? According to the nonprofit Charity Navigator, which evaluates charities, it’s because the year-end holidays are a time “of religious and moral reflection” that inspires many people to reach out to those who are less fortunate.

While most charities do good work and channel their funds toward helping others, you’ve got to be careful of those masquerading as charities whose only aim is to take advantage of you.

Even with legitimate charities, you have to ensure that their work matches what you want to accomplish with your dollars.

Here are some tips:

Follow your philanthropic passions. According to Charity Navigator, there are about 1 million charities in the U.S. The group urges people not to settle for an organization that isn’t a match for their beliefs and goals. “Take the time to find it and confirm — not just assume — it offers the programs and services that match your charitable interests,” Charity Navigator says.

Ensure the charity is efficient, ethical and effective. Before you give to any charity this holiday season, be sure to check the charity’s fiscal health, Charity Navigator says.

According to the nonprofit, “Financially healthy organizations — those that are both financially efficient and sustainable — have greater flexibility and freedom to pursue their charitable mission.”

A critical document to review is the organization’s Form 990, which most federally tax-exempt organizations must file with the IRS each year. It provides information on the organization’s mission, programs, and finances.

On the Form 990, first look on Page 2, where the charity describes its Program Service Accomplishments.

“This can give a donor [an idea of] how the charity allocates its efforts and expenditures among its main programs,” said Michelle Monse, president of the Carl B. & Florence E. King Foundation in Dallas, a private foundation.

Then go to Page 10, Part IX, for the Statement of Functional Expenses.

“Filers are supposed to break down their total expenses by the portions devoted to program services, management/general, and fundraising,” Monse said. “You have to look at line 25 and do your own math to get the ratios.”

Donors should expect the bulk of their money to go toward actual charitable activities, rather than to fundraising and administrative costs.

But you must be realistic, Charity Navigator says.

“Recognize that 100 percent of your gift cannot go toward the charity’s programs,” the group says. For example, each charity must pay for basic infrastructure costs such as postage, utility and insurance expenses.

The group urges people to instead donate to “efficient charities” that spend at least 75 percent of their budget on programs and services, 15 percent on administration and 10 percent on fundraising.

“After all, the charity’s ability to bring about long-lasting and meaningful change in the world is the key reason for their existence and for your donation,” Charity Navigator says.

AT A GLANCE: Form 990

Most federally tax- exempt organizations must file Form 990 with the IRS each year. It provides information on the organization’s mission, programs, and finances.

Not every charity is required to file a Form 990. Churches, state institutions and nonprofits that haven’t received tax-exempt status from the IRS don’t have to file.

An organization that files a Form 990 is required by law to let you view the document.

You can also find Form 990s at charitynavigator.org and guidestar.org. GuideStar is a nonprofit organization that collects and organizes information on charities.

Cascading Problems Flow from This Nonprofit’s Failure to Pay Payroll Taxes

The 25 year old Alliance of AIDS Services-Carolina has long been under contract to Wade County but that ended this year after it came to light that the IRS had placed a tax lien on the organization for failing to pay $209,539 in payroll taxes in 2012. That lien caused the state to exclude the group from some sources of government funding. 

There is some indication that the organization was having financial difficulties during 2012 – 2013 but, of course, it is never appropriate to try to “manage” those kinds of problems through neglecting a payroll tax liability. Maybe not appropriate but excruciatingly common.

In April and then in July the IRS made its displeasure clear by issuing a tax lien and then in September state finally cut off its Ryan White funding. Now the organization has managed to get back in “good standing” with the IRS but although DHHS allowed funding to start flowing again in October. But by then Wake County had ended its contract with the group, hiring its own staff to perform the services previously provided by the Alliance and it apparently does not intend to reverse that decision.

We have said this before but it is worth repeating, not paying payroll tax is the worst financial decision ever, a truly terrible look for a nonprofit, creating distrust among multiple groups of stakeholders in one fell swoop but this practice is also often concurrent with other problems. We have covered a number of those stories this year including this one about a 48 year old community health centerthat eventually closed after having a grant suspended after having a tax lien placed on them after not paying $500,000 dollars’ worth of payroll taxes

Form 990: Late filing penalty abatement

FROM JOURNAL OF ACCOUNTANCY:

Many small and medium-size not-for-profit organizations are mostly run by volunteers, and the staff of these charities may forget or inadvertently fail to timely file Form 990, Return of Organization Exempt From Income Tax, Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, or even Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations, which is a postcard-size information return that is electronically filed. IRS penalties for late filing can be hefty, not the least of which is the loss of exempt status after failing to file for three consecutive years. It can be devastating to receive penalty letters from the IRS telling the not-for-profit to pay thousands of dollars in penalties or pulling the organization’s exemption.
  
PENALTY FRAMEWORK

Sec. 6652(c)(1) imposes a penalty on any tax-exempt organization for failure to file a tax return or failure to include complete or correct information on the tax return. For organizations with gross receipts less than $1 million, the penalty is $20 for each day during which the failure continues, with a maximum penalty of the lesser of $10,000 or 5% of the organization’s gross receipts for the year. If gross receipts are more than $1 million, the penalty is $100 for each day the return is late with a maximum penalty of $50,000 (Sec. 6652(c)(1)(A), flush language).

It is important to note that (1) the statute provides the formula for the penalty calculation; (2) the IRS has no discretion to decide how much of a penalty to impose; (3) the statute does not allow for imposition of a partial penalty; and (4) the penalty is either fully enforceable or fully unenforceable (see Service Employees International Union, 598 F.3d 111 (9th Cir. 2010)).

CRITERIA FOR PENALTY RELIEF

Generally, relief from penalties falls into four categories: (1) reasonable cause; (2) statutory exceptions; (3) administrative waivers; and (4) correction of service error. The first three categories are discussed in this article. IRS Appeals may recommend the abatement or nonassertion of a penalty based on these four criteria as well as “hazards of litigation” (Internal Revenue Manual (IRM) §20.1.1.3).

REASONABLE CAUSE

No penalty is imposed if the taxpayer shows that the failure to file the tax return is due to reasonable cause (Sec. 6652(c)(4)) and not willful neglect (Regs. Sec. 301.6652-1(f)). Neither reasonable cause nor willful neglect is defined in the Internal Revenue Code. Regulations provide that if the taxpayer exercised ordinary business care and prudence and was unable to file the tax return within the prescribed time, then the delay is due to reasonable cause (Regs. Sec. 301.6651-1(c)(1)). Court cases interpret the term “willful neglect” to mean “a conscious, intentional failure or reckless indifference” (Boyle, 469 U.S. 241 (1985)).

FACTORS THE IRS CONSIDERS IN DETERMINING REASONABLE CAUSE

The IRS considers the following factors, along with other criteria, in determining reasonable cause (see IRM §20.1.1.3.2):

• What happened, and when did it happen?
• What facts and circumstances prevented the taxpayer from filing a tax return, paying tax, and/or otherwise complying with the law?
• How did the facts and circumstances result in the taxpayer’s not complying?
• How did the taxpayer handle the remainder of his or her affairs during this time?
• Once the facts and circumstances changed, what attempt did the taxpayer make to comply?

These criteria apply to all taxpayers, not just tax-exempt organizations.

ESTABLISHING REASONABLE CAUSE

A taxpayer, including a tax-exempt organization, must meet the ordinary business care and prudence standard to establish reasonable cause. Any evidence that a taxpayer exercised ordinary business care and prudence but nevertheless failed to comply with the tax law may be considered for penalty relief. In determining if the taxpayer exercised ordinary business care and prudence, the IRS considers the taxpayer’s reasons and reviews the dates and explanations to ensure they correspond with events on which the penalties are based. The IRS also examines the taxpayer’s compliance history for the three preceding tax years for payment patterns and overall compliance and looks at the length of time between the event cited as a reason for the noncompliance and subsequent compliance. Finally, the IRS considers whether there were circumstances beyond the taxpayer’s control and whether the taxpayer continued to attempt to meet the requirements, even though late (IRM §§20.1.1.3.2, 20.1.1.3.2.1, and 20.1.1.3.2.2).

PROCEDURE FOR CLAIMING REASONABLE CAUSE

Regs. Sec. 301.6652-1(f) provides that a request for abatement of penalties based on reasonable cause must be made in the form of a written statement, containing a declaration by the appropriate person in the organization that the statement is made under penalties of perjury, setting forth all the facts alleged as reasonable cause. This statement should be made as an attachment to Form 990 and should include supporting documentation and address:

• The reason the penalty was charged (either a late filed return, an incomplete return, or both);
• The circumstances that prevented the organization from complying with the timely filing requirement, including circumstances that led to failure to request an extension if the organization failed to get an extension;
• Why the failure was not due to willful neglect;
• How the organization exercised ordinary business care and prudence; and
• The steps being taken to prevent the problem in the future.

The taxpayer should attach documents that support any material aspect of the reasonable-cause claim to the statement. The burden of proof is on the taxpayer to establish both reasonable cause and lack of willful neglect (Boyle, 469 U.S. 241 (1985)). The elements that must be present to constitute reasonable cause for a late filing is a question of law, but whether these elements are present in a given situation is a question of fact (Conklin Bros. of Santa Rosa, Inc., 986 F.2d 315, 317 (9th Cir. 1993)).

SOME ADDITIONAL TIPS

Whether attaching a statement with Form 990 or writing a letter in response to the notice, the taxpayer should indicate that the organization took corrective measures as soon as the mistake was brought to its attention and state that the organization intends to comply with the law at all times. If the organization is otherwise current with all its filings, that should be mentioned as well. This strengthens the argument that the organization intended to comply, that failure to file was not due to willful neglect, and that the organization has taken affirmative action to stay on track with timely filings.

In addition, organizations should make sure their accounting records are accurate because, if assessed, penalties are based on gross receipts. Incorrect gross receipts may result in incorrect penalties, may require amended tax returns, and can trigger audits.

A practitioner who represents a not-for-profit that received a penalty notice should obtain a Form 2848, Power of Attorney and Declaration of Representative, from the organization so that the practitioner can contact the IRS to have a hold placed on the account until he or she has time to prepare a response to the notice.  

EXAMPLES OF REASONABLE CAUSE

Generally, circumstances beyond a taxpayer’s control can give rise to reasonable cause for all taxpayers, including not-for-profit organizations. Examples include death, serious illness, or unavoidable absence; fire, casualty, natural disaster, or other disturbance; mistakes; and wrong advice or reliance on incorrect advice and ignorance of the law (IRM §§20.1.1.3.2.2.1–20.1.1.3.2.2.7).

Although the IRS considers casualty to be reasonable cause, in the case of American Friends, the argument that loss or destruction of records during relocation constituted reasonable cause was not accepted because the organization’s bookkeeper had failed to make efforts to salvage waterlogged boxes containing financial records. Instead she had simply thrown them out. By doing so, the taxpayer had shown little regard for maintenance of records (American Friends of Yeshivat Ohr Yerushalayim, Inc., 04-CV-1798 (CPS) (E.D.N.Y. 6/9/09)).

In another case, due to his age, health, and lack of experience, the responsible person was unable to cope with the emergency situation created by the unexpected illness of his attorney shortly before the tax return was due. The taxpayer therefore had reasonable cause for filing late, the court held (Brown, 630 F. Supp. 57 (M.D. Tenn. 1985)).

To make a reasonable-cause determination, all the factors have to be evaluated based on the facts and circumstances of each case (Rohrabaugh, 610 F.2d 211 (7th Cir. 1979)). Such an approach is necessary because it is “not the purpose of the law to penalize … innocent errors made despite the exercise of reasonable care” (Spies, 317 U.S. 492, 496 (1943)).

FIRST-TIME PENALTY ABATEMENT

Starting in 2001, the IRS started granting first-time abate (FTA) penalty relief for failure-to-file, failure-to-pay, and/or failure-to-deposit penalties if the taxpayers were not previously required to file a return or if no significant penalties (except the estimated tax penalty) had been assessed in the prior three years. The purpose for granting the waiver was to reward past tax compliance and promote future tax compliance. The FTA program is an administrative waiver and applies to a single tax year (IRM §20.1.1.3.6.1).

PROCEDURE FOR REQUESTING FIRST-TIME ABATE WAIVERS

Taxpayers and practitioners can request FTA penalty relief over the phone or in writing. This penalty waiver does not have a dollar threshold for any oral statement authority (OSA). OSA is the acceptance of a verbal request for account adjustment without written documentation, or for account information without a written request (IRM §21.1.3.20). The author has claimed thousands of dollars in penalty abatements over the phone. The key is to specifically ask for this waiver when calling the IRS.

According to a Treasury Inspector General for Tax Administration (TIGTA) report released in 2012, not all taxpayers with compliant tax histories received FTAs, because taxpayers must specifically request that their penalties be abated to be considered for penalty relief under the FTA program (see TIGTA Rep’t No. 2012-40-113). The IRS does not widely publicize the opportunity to request an FTA waiver, so most qualifying taxpayers don’t know that an FTA is available. Based on TIGTA’s recommendations, the IRS agreed to identify ways to increase taxpayer awareness of the FTA program. Nonetheless, millions of taxpayers who qualify for FTA waivers are still unaware that they can receive them.

FIRST-TIME PENALTY ABATEMENT VS. REASONABLE CAUSE

In the case of multiple years of late filings, it is better, if possible, to claim penalty relief by showing reasonable cause and the absence of willful neglect first and then use the FTA in a subsequent year when the organization does not have reasonable cause for a late filing. A taxpayer is not disqualified from claiming an FTA in a tax year if the taxpayer claimed penalty relief due to reasonable cause in one of the three preceding years.

OTHER TYPES OF PENALTY RELIEF

Examples of statutory exceptions that may provide relief for exempt organizations include timely mailing being treated as timely filing and paying (Sec. 7502) and penalty relief based on erroneous written or oral advice from the IRS (Sec. 6404(f)). The IRS may also grant an administrative waiver (other than an FTA) from a penalty when it has delayed printing or mailing forms, publishing guidance, and in certain other cases.

CONCLUSION

Most not-for-profit organizations rely on donations, and paying penalties can use up funds that are not easily replaced. Besides this, an organization that fails to file the required information returns for three consecutive tax years automatically loses its tax-exempt status. It is better to have a system in place to keep track of important deadlines, follow up on a timely basis with persons responsible for filing tax returns, and take steps to ensure there is no breakdown in communication between management and the attorney, CPA, or volunteer responsible for filing the return. Most of all, practitioners and tax-exempt organizations should take their responsibility for tax compliance matters seriously.

How to Check Out a Charity

Well over a million charities operate in the U.S. alone, and some do much more good work than others. To make sure your contributions go to the groups that accomplish the most, start by consulting watchdogs like Charity Navigator (charitynavigator.org), the American Institute for Philanthropy (charitywatch.org) and the Better Business Bureau’s Wise Giving Alliance (give.org). These outfits rate charities based on factors like how they spend money, protect donor privacy and pay their employees. Charity Navigator even offers lists such as “10 Highly Rated Charities with Low-Paid CEOs” and “10 Highly Rated Charities Relying on Private Contributions” to help you narrow your search for a worthy cause.

Look at the IRS Form 990 of any charity you’re considering. It provides information on the group’s mission, programs and finances. GuideStar (guidestar.org) offers these forms on 1.8 million tax-exempt organizations for free. Finally, check with your state’s attorney general’s office. Every nonprofit that solicits money has to register with its state. 

Prefer giving to a local organization? Contact your area’s Better Business Bureau to see whether it has evaluated the charity you want to support.

Check out the fiscal health of any charity that interests you. Look for its annual report, which should summarize its programs, governance and finances. You may find the report on the charity’s website but if not, ask to be sent a copy. 

The bulk of the money a charity collects should go toward programs, with no more than about 25 percent allocated for administrative costs like fundraising and salaries. “However, if your favorite charity happens to slip below that [75/25] ratio one year, don’t just drop it from your giving portfolio,” says Sandra Miniutti, vice president of marketing for Charity Navigator. Ask what’s going on and how the organization plans to improve its efficiency. Numbers don’t always tell the whole story.

Any charity to which you donate should be happy to tell you what it’s trying to achieve, how this goal will be accomplished and what it has done so far. It should also be willing to say who leads the organization and how it’s run. You can double-check some of this information by looking at Form 990’s Statement of Program Service Accomplishment, where the charity reports its largest programs and funding allocated to them. You can also visit greatnonprofits.org, where donors and volunteers write reviews and share information about charities and other nonprofits.

An amateurish-looking website or a lack of detail can be a tipoff that a charity is questionable. Other things to watch out for include lookalike names and overly boastful claims, says Bennett Weiner, chief operating officer of the Wise ­Giving Alliance. 

America's Worst Charities

The Tampa Bay Times lists America's Worst Charities based on cash paid to solicitors in the past decade.

See who is on the list.

http://www.tampabay.com/americas-worst-charities/