The Internal Revenue Service is scrutinizing donor-advised funds for possible abuse, according to Dow Jones. 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 tax return. The IRS has concerns, one being that funds have been used as tax-free slush funds for donors. The Pension Protection Act of 2006, passed in August, for the first time defined the funds in the tax code and also enforced fines and penalties for improper gifts. The IRS is worried “that people are using the donor-advised funds for personal expenses like tickets or tuition,” said Charles B. Gordy, managing director and senior planned giving officer at Bank of New York. An example of abuse could be if a secondary school waved tuition payments for a child of a parent who gave a donor-advised gift to the school, said Victoria Bjorklund, a partner and head of the exempt organizations group at Simpson Thacher & Bartlett, a law firm in New York. The Pension Protection Act took a group of financial instruments that have been unregulated for decades and made them “a highly regulated area,” said Bruce Makous, vice president for development at the Multiple Sclerosis Association of America and president of the Planned Giving Council of Greater Philadelphia. Makous has been a critic of certain aspects of the funds, stating that charities sometimes give kickbacks to the 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, he said. “I think that some charities are concerned about new regulation that might come down the pike and are looking at their practices,” said Makous, who has advised a congressional committee on donor-advised funds. “There’s pretty widespread concern about additional regulation of donor-advised funds.” On the other hand, 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, said Bjorklund. “I’m not aware that the IRS had any intention or desire to eliminate or harm the operation of donor-advised funds, which I think are a very valuable part of the charitable-giving sector, she said. The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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