In case you are unsure of what qualifies your donation to a charitable society to be tax-deductible, you have to know the meaning of “tax exempt organization”. An organization that is tax exempt means it has been exempted from paying income taxes on their profits. These are listed under Section 170(c) of the Inland Revenue Code. 

There are categories of qualified charitable organizations under section 170(c) of the Internal Revenue Code. These are:

• A state or United States possession (or political subdivision thereof), or the United States or the District of Columbia (if your donation is made exclusively for public purposes)

• A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the US, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals

• A church, synagogue, or other religious organization

• A war veterans' organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions

• A nonprofit volunteer fire company

• A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services)

• A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes

• A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt

The section in the Inland Revenue Code that governs these tax exempt societies is 501(c). These organizations receive most of their financial support from the public rather than from a small group of individuals (such as shareholders). They also use most of their donated money to further their exempt-organization goals instead of investing their money to make more profit.

In Section 501(c) itself, there are differences insofar as tax-deductibility is concerned. Donations to 501(c)(4) tax-exempt groups are not deductible by the donors. But if you give a gift to an IRS-approved 501(c)(3) organization, you can deduct that gift on your taxes.

To deduct a charitable donation, you must file Form 1040 and itemize your deductions under Schedule A. If your total deduction for all non-cash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return. If your contribution is more than $5,000 (which usually includes property or other non-cash assets), you must also complete Section B of Form 8283. This generally requires an appraisal by a qualified appraiser.

 

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As we approach the end of the year, people will be thinking of making charitable donations in order to offset their tax bill. If it is so for you, it is crucial that you know the rules of making tax deductible charity donations. Fortunately, the IRS shows you what is required to do so.

First off, you must ensure your charitable contributions of money or property are made to qualified organizations i.e. organizations that are recognized as charitable societies under section 170(c) of the Internal Revenue Code. Then you should itemize your deductions when submitting your tax return. Generally, you may deduct up to 50% of your adjusted gross income, but 20% and 30% limits may apply in some cases.

The 50% limit of adjusted gross income is calculated without regard to net operating loss carrybacks. And this applies to all public charities (code PC), all private operating foundations (code POF), certain private foundations that distribute the contributions they receive to public charities and private operating foundations within 2 ½ months following the year receipt and certain private foundations that pool the contributions received in a common fund and the income and corpus of which are paid to public charities.

The 30% limit applies to private foundations (code PF), other than those previously mentioned that qualify for a 50 percent limitation, and to other organizations described in section 170(c) that do not qualify for the 50 percent limitation, such as domestic fraternal societies (code LODGE). Contributions to certain private foundations, veterans’ organizations, fraternal societies, and cemetery organizations are limited to 30% adjusted gross income (computed without regard to net operating loss carrybacks.

Bear in mind that if you receive a benefit out of donating, you must deduct the value of this benefit and claim the net balance of your deduction. For example, if you buy a charity dinner ticket and attend the event, your cannot claim the full amount of the ticket price because you received the benefit of the dinner. So you must assess the value of the dinner and net off this value from your ticket price before submitting the net balance for tax deduction.

Donations may be made either in the form of cash or kind i.e. other forms of assets such as properties. If you donation is in cash, it can be deducted at face value subject to the limits stated above. If you donate property, it has to be valued at fair market value and its value deducted. There are special rules that apply to vehicle donations.

Finally, regarding cash donations, you must maintain accurate records of your donation showing the name of the organization, the amount and the date of contribution. This can be in the form of official receipts, check buds, payroll slips, bank records etc.

 

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Taxation in the US is largely based on self-assessments of taxes owed, a system that is called voluntary compliance. Intentional non-compliance or tax evasion is a crime and offenders face the possibility of a civil audit or criminal investigation which could lead to expensive tax penalties or prosecution and possibly imprisonment.

How does the IRS investigate cases of tax evasion? There is an IRS department that specially carries out these tasks and it’s called the Criminal Investigation department. The Criminal Investigation department comprises of nearly 4,200 employees, among whom about 2,800 are special agents who investigate tax evasion, money laundering and Bank Secrecy Act laws violations. So the job of the CI department is to investigate whether a taxpayer willfully attempted to hide income from the government. In doing so, it is common to uncover other criminal activities including fraud, money laundering or Bank Secrecy Act violations.

As part of their jobs, CI special agents are highly trained to recover computer evidence, using specialized equipment to recover financial data that may have been encrypted, password protected, or hidden by other electronic means.
The role of the Criminal Investigation department falls under 3 basic categories of criminal activities:

1. Legal Source Tax Crimes

2. Illegal Source Financial Crimes

3. Narcotics-related Financial Crimes and Counterterrorism Financing

Legal source tax crimes

This type of crime is commonly known as "white collar" crime and it means income tax evasion, failure to file or filing a false tax return. The crimes often include employment tax fraud, false claims for tax refunds, abusive trust schemes, actions of unscrupulous tax return preparers and frivolous filers/non-filers who are people usually not involved in other criminal activity.

Illegal source financial crimes

This type of crime involves money drawn from illegal sources such as embezzlement, kickbacks, health care fraud or telemarketing fraud. It refers to all tax and tax-related violations, as well as money laundering and Bank Secrecy Act/currency violations. The crimes may also include over-billing of Medicare, kickbacks to public officials, activities to obtain money through telemarketing scams, securities fraud, Ponzi schemes or even illegal gaming activities.

Narcotics-related financial crimes and counterterrorism financing

When investigating narcotics- related crimes, the CI department fights against those involved in drug trafficking and money laundering. In counterterrorism financing cases, the goal for IRS is to eliminate the funding for any further terrorist activities. Often this task is carried out in collaboration with the federal government through their joint terrorism task forces.

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If you are running a business you will incur expenses, some of which are tax deductible. Naturally, the IRS would not allow just any type of expenses to be tax deductible. The most difficult type of expense to be approved for tax deduction is entertainment expenses.

According to the IRS website (www.irs.gov), generally only 50% of food and beverage and entertainment expenses are allowed as a deduction. So that means when you use tax software to prepare your tax returns, you should enter the full amount of expenses incurred and your software will cut it down by half. The exception to this 50% rule is when you invite the general public to an event you put on to promote your business. Such an expense would be considered advertising expense and is then 100% deductible.

There are a few conditions that the IRS sets for you to successfully claim tax deduction on entertainment expenses. If you are an employee (i.e. you do not run the business) who is reimbursed by your company for entertaining clients, you should not claim this expense from your taxes, neither should your reimbursement be included in your W-2 form. However, if you are not reimbursed or only partially reimbursed for your entertainment expenses, then you may deduct employee business entertainment expenses that otherwise qualify as deductible expenses. Unreimbursed expenses and expenses that exceed reimbursement are carried over to Form 1040, and are generally subject to the 2% of adjusted gross income limit according to the IRS website.

If you are the owner of your business, generally to be deductible your entertainment expense must be to close the sale or bring some form of benefit to your business. Most people assume that just because the expense involves potential customers it qualifies as tax-deductible expense. This is not necessarily so. If you have a meal with potential customers just to develop rapport, it is not considered tax-deductible. But if you make a business presentation before your meal with potential customers, then it becomes a tax-deductible entertainment expense.

Bear in mind that expenses for employees is considered 100% tax-deductible. For example, if you throw an office party at the end of the year or if you buy dinner for your staff because you want them to work after office hours to finish a project, this is allowable entertainment expenses.

Also, entertainment facilities such as timeshares, cabins, yachts, swimming pools, etc are also not deductible business entertainment expenses. And if your expense is less than $75, you do not require a receipt except that you need to provide full details of the expense – time, date, venue, names of persons entertained etc.

 

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On June 8th, 2011, the IRS revoked the tax exempt status of 275,000 organizations effective as of May 15th, 2010. Many of these organizations affected are ministries. These ministries were given due notice that their tax-exempt status would be revoked because they failed to file 990 tax returns for three consecutive years beginning with tax year 2007.

In the past, tax-exempt ministries did not have to file tax returns if their gross income was less than $25,000 each. Now regardless of income, every organization (except churches) have to file either a 990N, 990 EZ, 990 (long form) or a 990PF.

The consequences of this new ruling are two-fold. Firstly, the ministries that have their tax-exempt status revoked would have to pay taxes for the last 3 years. More specifically, the ministries now have to file federal income tax return Form 1120, state income tax returns and pay taxes on its net income, with penalties and interest. Because of the loss, many organizations that have sales tax exempt status will have to pay back to the state the sales taxes that it was exempt from paying, with penalties and interest.

Secondly, the contributions these ministries receive from donors would not entitle the donors to deduct their giving from income taxes. This would inevitably reduce the amount of contributions they receive. In addition, donors may file civil lawsuits against the ministries and office bearers (such as the pastors) personally, holding them responsible for their increase in taxes.

If you wish to check if the ministry you support is still currently a tax-exempt one, go to the IRS website at http://www.irs.gov/Charities-&-Non-Profits/Automatic-Revocation-of-Exemption-List and search by state. Please click the state where your ministry is located or was located at the time that you received your tax exempt approval.

It is possible to have the tax-exempt status reinstated. To do so, the ministries must file a new Form 1023. For many ministries, this may be a better alternative than having to explain to donors that their contributions were not tax deductible.

 

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