IRS Warns Taxpayers to Avoid Promoters of Fraudulent Charitable Contribution Tax Schemes, IR-2024-304

The IRS warned taxpayers to avoid promoters of fraudulent tax schemes involving donations of ownership interests in closely held businesses, sometimes marketed as “Charitable LLCs.” Participating in an abusive scheme to reduce tax liability can result in assessment of the correct tax owed, penalties, interest and potentially fines and imprisonment. Charities also need to be careful they do not knowingly enable these schemes. These schemes typically encourage higher-income taxpayers to create limited liability companies (LLCs), put cash or other assets into the LLCs, then donate a majority percentage of nonvoting, nonmanaging, membership units to a charity while the taxpayer maintains control of the voting units and reclaims the cash or asset(s) directly or indirectly for personal use.

The IRS is currently using a variety of compliance tools to combat abusive donations, including thorough audits of tax returns and civil penalty investigations. IRS active promoter investigations and taxpayer audits in this area have resulted in a promoter pleading guilty and others being criminally convicted of this scheme, including a donor who pled guilty to obstruction.

The IRS advised taxpayers to be wary of any scheme that involves transferring assets to an LLC, followed by the “donation” of a majority percentage of nonvoting, nonmanaging, membership units to a charity as a “charitable contribution” while the taxpayer retains control over and access to the assets. A valid charitable contribution requires the taxpayer give control over the donated assets to the charity. Finally, taxpayers should use caution when they are promised any personal benefit, beyond the tax deduction, based on a charitable donation.

IR-2024-304