Bigger Tax Breaks, Fewer Strings, More Abuse

The IRS is aware of organizations that “appeared” to have abused the basic concepts of donor advised charitable funds, according to advisory issued last month.

“These organizations, promoted as donor-advised funds, appear to be established for the purpose of generating questionable charitable deductions, and providing impermissible economic benefits to donors and their families …  and management fees for promoters,” the tax agency said.

Use of these accounts is booming.

In 2006, the largest funds reported holdings in donor-assisted funds of $19.2 billion, an increase of $6 billion from 2005. Donations to the Community Foundation for the National Capital Region in Washington increased from $50 million to $335 million over the last 10 years.

Why are these funds growing?

  • Donors get tax breaks of up to 50 percent — 20 percent more than donors giving to private foundations like the Sallie Mae Fund.
  • Donors are anonymous.
  • Donors recommend how their gift is spent. While its only a recommendation,  the Journal of Accountancy points out failure to accede would be “frowned upon” by past and future donors.
  • Donations are held accountable to even fewer rules than other charities.

Lax regulations, however, led to abuse.

“According to IRS managers, examinations reveal that some donor-advised funds and supporting organizations are used in abusive schemes to unallowably benefit donors or related parties or give donors excess control of charitable assets in operations,” reported the General Accounting Office in 2006.

It added that in some cases the IRS “faces challenges” gathering evidence or addressing activities that do not seem to benefit charities, but do not violate any law or regulation.

For example, some donors to donor-advised funds and supporting organizations participate in schemes which allow them to regain their contribution, thus giving them a tax deduction on assets that did not actually go to charity,” the report said.

In 2006, Congress toughened regulations, requiring donations be used for charitable purposes and imposing penalties for self dealing.

Watchdog groups complained that the law didn’t go far enough to insure that money donated for the public good is used for the public good.

Under existing laws, the charitable donation can be kept in a donor-assited fund without being spent because there’s no requirement that a specific amount of money be used for charity each year.

Questions of how much a donor-advised should spend each year were supposed to be answered by the Treasury department. More than two years after the law’s passage Treasury has yet to complete a study ordered by Congress or to develop some of the regulations.

Last month, Sen. Chuck Grassley, R-Iowa, instructed Treasury Secretary Timothy Geithner during his confirmation hearing to give Congress a timeframe when the IRS study of donor advised funds would be finished and the issues that holding up new regulations.

In 2006, Congress required the Treasury to conduct a one-year study to determine whether tax breaks are proper. The study’s more than a year overdue.

The study must consider whether tax breaks are warranted when:

  • Donors benefit directly from their contributions through loans, compensation or other personal benefits;
  • Corporate or individual donors direct or control how their “gift” is invested.
  • Corporate or individual donors direct or “recommend” how a donation is spent.
  • The donor retains various rights associated with stocks, such agreements that stock be sold at an agreed upon date at an agreed upon price.

The study also must review whether these funds should be required to distribute a specific amount of money each year.

“Concerns have arisen about the “payout” rate to charities, and Congress is considering a minimum payout requirement, similar to the one for private foundations,” the Government Accounting Office wrote in its 2006 review.

Congress didn’t require a minimum payout in reform legislation passed in 2006.