The Internal Revenue Service is reportedly scrutinizing donor-advised funds for possible abuse by individual donors, sponsoring organizations, such as endowments, and even recipients. These funds allow an investor to add money to an account from which gifts are made to their charities of choice over time. A donor may deduct the full amount of the initial contribution from his or her tax return.
One of the IRS's concerns is that donors are using the funds as tax-free slush funds for personal expenses like tickets or travel. Another example of abuse could be if a recipient were to give preferential treatment to a donor, such as a secondary school waiving tuition payments for a child of a parent who gave a donor-advised gift to the school.
Critics further note that charities sometimes give kickbacks to sponsoring organizations. For example, a sponsoring organization that directs a gift to a certain charity might be rewarded with a contract to mange the money for the charity.
While some charities fear this will lead to new regulations, others say donor-advised funds are thriving and need not fear the recent scrutiny. The IRS has become aware of some bad practices and has a right to see that those practices are eliminated, they say.
The Pension Protection Act of 2006 for the first time defined the funds in the tax code and also enforced fines and penalties for improper gifts.
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