Charity Fraud: Is The IRS Doing Enough To Vet Bogus Exemptions for Tax Scams?

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The Internal Revenue Service (IRS) is coming under fire from charitable organization regulators, Congress and its own independent overseer for an inability to properly identify fraudulent applications and for approving phony charities to claim tax exemption status.

A recent fraud investigation and two new Treasury Inspector General for Tax Administration (TIGTA) reports on the IRS’s screening and operations processes are raising concerns about whether the IRS has the capability to perform its important charity “gatekeeping” task and whether it should continue to.

The two TIGTA reports, released on Sept. 29 and Oct. 3, reviewed the IRS’s enforcement program with regard to bogus charities applying for tax-exempt charity status and the agency’s competence to approve streamlined applications given its unreliable fast-track application process and a serious lack of information required by applicants.

According to the New York Times, in an effort to contend with backlogs and budget cuts, the IRS adopted a fast-track system for approving tax-exempt charitable applications. However, per agency data, the agency rejects only one application for every 2,400 submissions, or less than 1%, according to the TIGTA reports.

Particularly damning is the fact that TIGTA itself went undercover and applied for tax exemption for five fake organizations. Although one application raised red flags, four were approved for 501(c)(3) tax-exempt status by the IRS.

Based on its investigations, TIGTA contends that there are “vulnerabilities” in the IRS tax-exempt application process, a lack of information requested on its Form 1023-EZ application and inaccurate information on the application’s online guidance section, reports Accounting Today.

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“Without sufficient information on the streamlined application, the IRS may approve tax exemption for organizations that do not meet the legal requirements, and could allow unscrupulous individuals to use the exemption for illegal activities,” read the report. “This could also diminish public trust in legitimate tax-exempt organizations.”

The IRS watchdog also brought up concerns about the absence of formal disclosure agreements between state attorney general offices and the IRS (there are currently none). Without coordination and information sharing between the two sides, illegal activities and public defrauding have a better chance of remaining undetected.  

The agency was already in hot water for its handling of fraudulent tax-exempt status applications and the haphazard approval process. According to a New York Times report in July, prosecutors have accused Ian Hosang, a 63-year-old convicted stock market swindler, of running a fraudulent charity con resulting from the IRS approving 76 of his fake nonprofits.  

The article prompted House Ways and Means Oversight Subcommittee chair Bill Pascrell (D-N.J.) to contact outgoing IRS Commissioner Chuck Rettig for some explanations.

Hosang applied for tax-exempt charity status with bogus, but official-sounding, organization names like “the United Way of Ohio.” The New York Times claims that between 2014 and 2018, the agency approved 17 of Hosang’s “charities” that included “American Cancer Society” in their charity names. All the charities were traced to one rented mailbox in Staten Island.

In the article, two problems are identified with the IRS’s application vetting process. First, nonprofits are not prohibited from impersonating well-known charities’ names. Second, the IRS does not seem to have an effective, standardized audit of an applicant’s criminal history.

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This inadequate vetting has a number of former employees perplexed, per the New York Times.

“Nobody’s watching the store,” said Nina E. Olson, the IRS’s in-house national taxpayer advocate from 2001 to 2019. “They’re the gatekeeper to this whole universe of charitable subsidies. And if the I.R.S. is not doing its job as a gatekeeper, then you’ve got real problems.”

Former IRS tax-exempt section head Marcus S. Owens adds, “You could be Jesse James or John Dillinger. There’s nothing that says you can’t apply for tax-exempt status from a jail cell, having been convicted of charity fraud.”

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