As individuals consider end-of-year tax strategies, the IRS is cautioning against illicit “Charitable LLC” tax schemes. While charitable deductions for donations of ownership interests in closely held businesses are permissible when properly transacted, the IRS warns that these fraudulent and abusive scams are on the rise and are putting participating taxpayers in legal jeopardy. 

“Charitable LLC” schemes are generally marketed to high-income individuals as “tax-free” wealth strategies or a way to claim a charitable deduction for “donated” assets over which the taxpayer still maintains effective control. In a recent press release, the IRS explained that scam promoters will often help the high-income individual establish and fund limited liability companies (LLCs) that then give nonvoting membership interests to a charity. The client taxpayer, however, maintains authority over the LLC and can continue to access its cash or other assets. To complete the scheme, the scam promoter may suggest specific appraisers and charities willing to participate in these transactions, and he or she may even control the registered 501(c)(3) organization to which the ownership interests are donated.  

The IRS noted that hundreds of tax returns have attempted to use such abusive transactions for a charitable deduction, and it is combating them through audits and other investigations that can result in financial penalties and even incarceration for participants. For example, earlier this year a Florida attorney was sentenced to eight years in prison for selling his fraudulent “Ultimate Tax Plan,” and last month the U.S. Department of Justice announced one of his wealthy clients, a doctor in Ohio, faces a potential three-year prison sentence for his part in the scheme.  

“To avoid penalties, interest, and potential fines or imprisonment, the IRS encourages taxpayers to watch out for abusive transactions marketed by unscrupulous promoters,” the agency said. 

It added, “Charities also need to be careful they do not knowingly enable these schemes.” 

Nonprofits and taxpayers should be wary of red flags identified by the IRS that are often associated with “Charitable LLC” scams. In particular, the agency notes, “Taxpayers should use caution when they are promised any personal benefit, beyond the tax deduction, based on a charitable donation.” 

Ministries of integrity attempting to help givers properly donate closely held business stock or other noncash gifts may wish to explore ECFA’s eBook, “7 Essentials of Noncash Gift Administration for Ministries.”