Tuesday, September 9, 2014

When is a non-profit NOT a non-profit?

I once saw this sign taped to a cash register: 
"This is a non-profit organization.  It wasn’t meant to be, but that’s how it turned out."

Holidays are fast approaching and so is the end of the year. This is the time that people tend to donate to charities and nonprofits. Considering how much money and goods are spent and donated toward “good causes”, it is essential that people understand what is a non-profits or charity. 

So have you ever wondered what happens to your donation if it goes to an organization that is not a charity recognized by the IRS?  You might be asking, how can you tell if a charity is officially recognized by the IRS?  This is what the 501(c)(3) is all about. These documents must be submitted to and approved by the IRS to authorize it as a nonprofit organization. This means a company can claim (all be it not legally) that they are a nonprofit and not have a 501(c)(3) on file with the IRS.  This claim could be made while their application is pending approval.  Or it could be a fraudulent claim to cheat generous donors during the holiday season or during disaster relief efforts.  Unless you ask the right questions you may not know.  

Most people see a non-profit and think, “Well that's a good cause, and it’s a tax deduction, why not? I can donate,” In reality, if that company is not a valid IRS approved nonprofit, your donation is NOT tax deductible. So, now knowing this, you might ask how a nonprofit can tell you your donation is eligible for tax credit when in fact it’s not.  Well, it is called fraud.  Most of these organizations won't tell you because they want to cheat you.  They want your money.  In reality, these groups are seeking donations without a valid 501(c)(3) aren't really the type of organization you would support with your donations. These fraudsters take in significant sums of money and supposedly don't make any profit.  Yet their CEO gets paid big bucks and they've actually only donated maybe five to ten percent of their gross donation amounts.  In financial accounting terms, they are non-profits due to their exceedingly high overhead and operating expenses.

You might be thinking well how does this affect me?  Well, other than the obvious fact that your donation isn't being used in the way you expect it to be used, your donations does not qualify as a tax deduction.  This means come tax time, you will file for a deduction that will be denied by the IRS.  Then you will have to file an amended return after recalculating your actual IRS approved tax deductible donations. That means, if you donated $2000 to reduce your tax liabilities and lower your tax bracket, you could find yourself cheated out of $2000 and you haven't reduced your tax liability at all. So now think about how that will affect you down the line. 

It would be easy to say well I'm just going to donate to big established charities, which admittedly makes sense. But don't get too jaded.  Before deciding to donate to a charity you don’t know much about, here are some proactive measures you can take:
1. Ask the charity for proof of their currently valid 501(c) (3) documentation;
2. Check with the IRS at www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check to confirm the organization’s 501(c)(3) is valid
3. Look up the charity’s rating on Charitynavigator.org

Special Note: A good charity incurs an overhead of 10-12% with the balance of their budget going to the target recipients. 

The Legal Eagles Inc.

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