IRS Targets Shady Supporting Organizations

“Supporting organizations” raise and disburse funds to support a specific operating nonprofit. A commonly seen example would be the “Friends of” some museum or college sports program.

The New York Times reports that the IRS is cracking down on “shady” uses this type of organization, having revoked exemptions from 72 such groups in the last five years.

Among the problems the I.R.S. found were supporting organizations that were created as tools in shady financial planning programs to let donors take a tax deduction, only to get their supposed charitable donation back through offshore investments or interest-free loans to relatives…

[Lois Lerner of the IRS] said the most common abuse involved promoters who set up supporting organizations on behalf of their clients. The client would take a deduction for donating money to the organization. Then, through a series of promoter-controlled transactions — some involving offshore activity — the “donation” would be returned to the client or a relative, often in the form of a no-interest loan.