Americans are well-known for their generosity in times of tragedy. But if you aren't careful about making sure the charity you're giving to is legitimate -- or that you set up the donation properly -- you could end up wasting your money and losing the tax deduction the IRS gives for charitable donations.
Fake Charities and Dud Deductions
Last November, shortly after Hurricane Sandy struck, the IRS issued a warning about scam artists impersonating charities and collecting donations from unsuspecting donors. By using official-sounding names that are similar to those of well-recognized national charities, these criminals not only benefit from the cash they pocket from donations but also collect vital personal information, such as Social Security numbers, credit card numbers and banking information, that they can then use for identity theft and other criminal activity.
Adding insult to injury, taxpayers who get caught by such schemes can't deduct their donations. Because they weren't actually given to a legitimate charity, those donations aren't eligible for the deduction for charitable contributions.
Losing Deductions on Legitimate Donations
Even charities that aren't scams can cause trouble for donors. In most states, it's easy to set up a charitable organization, but it can take a lot more work to file the paperwork and get approval from the IRS to become eligible to receive tax-deductible donations.
In such cases, donors may make gifts on assurances from the charity that its application with the IRS is in process, only later to find out that the organization never followed through or failed to get IRS approval.
Unfortunately, it can take months or even a year or more to get a new charity through the approval process. If a charity is approved, previous donations are retroactively given deductible status. But until then, donors are gambling that their charity will pass the IRS' tests.
Before You Give ...
In order to make sure the gifts you make to charity are legitimate and deductible, be sure to use the IRS website's Exempt Organizations Select Check. There, you can enter the name of any charity and get verification of whether it can accept tax-deductible contributions, as well as if it has had its previous deductible status revoked.
It's sad to have to go to such measures against scammers taking advantage of other people's tragedy. But with the right tools at your disposal, you can make sure your money goes to charities that will legitimately use it for good.