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Loopholes for tricking the taxman
February 6, 2012 5:32 PM   Subscribe

My aunt seems to be laundering her income through a 501(c)(3) charity which she is the secretary and treasurer of. Is this legal?

My aunt seems to make very large donations of her income to the same 501(c)(3) charity that she is the secretary and treasurer of. This seems highly unusual to me... has anyone ever heard of such a thing? Is it legal? Or is this just something that all the "smart money" people are doing as a way to dodge taxes, and I've only just now heard about it?
posted by shipbreaker to Work & Money (17 answers total) 2 users marked this as a favorite
 
Just to confirm, she is paid for her work at this organization?
posted by ThePinkSuperhero at 5:34 PM on February 6, 2012


Tax avoidance is 100% legal. Whether this is tax avoidance or tax evasion requires an accountant or lawyer, not ask mefi.
posted by Yowser at 5:39 PM on February 6, 2012 [1 favorite]


What does the charity do with the money? If it's buying cars, food, and furniture for your aunt, this is probably tax fraud. But there's nothing inherently illegal about donating money to a charitable organization, even if you're involved in the operation of that organization. Income from working for a nonprofit is taxed like any other income, though (special tax situations for clergy excepted).
posted by mr_roboto at 5:43 PM on February 6, 2012


It's absolutely legal to donate to a 501 (c) 3 of which you're an officer.

If the money she donates goes through the organization to pay for things that are for her personal benefit, like her housing or her travel expenses or similar, that is self-dealing and is illegal. (This happened with the higher-up management of a local college several years back, and it was a big scandal.)

But if she's giving money to the organization which the organization spends on its core mission, that's perfectly legal. How would she be "dodging taxes" by doing so? The tax breaks for charitable donations aren't that big. I know it seems a little roundabout for an organization to pay someone (for instance) $50,000 and for the person to donate $5,000 to the organization, but the thing is that as long as $50,000 (or whatever it is) is a reasonable salary for the position and the local job market, and there's no pressure from the organization to make a specific donation, there's no conflict of interest.
posted by Sidhedevil at 5:49 PM on February 6, 2012


The only thing I can think of in this situation that might conceivably be "money laundering" would be if your aunt was donating money from an IRA or a Roth account, or donating investment instruments or real property on which she would ordinarily be required to pay capital gains taxes, directly to the organization and then receiving a salary from the organization roughly equivalent to the amount or value of her donation.
posted by Sidhedevil at 6:03 PM on February 6, 2012


It would really depend on the situation. I don't think it is particularly unusual for officers of charities to make substantial contributions back to those charities.

Is her salary in the customary range for charities of similar size and focus (not that its necessarily any of your business to know your aunts salary)?
posted by Good Brain at 6:11 PM on February 6, 2012


If she is a volunteer member of the Board of that nonprofit. If she is receiving no benefit from that nonprofit, making donations is legal.

Many nonprofits EXPECT Board members to make substantial donations.

If she is an employee, it is still probably legal. I'm the ED of a nonprofit, I make donations to that nonprofit, this is legal as long as that money isn't, in some manner, flowing back to me above and beyond my salary.
posted by HuronBob at 6:12 PM on February 6, 2012


It's not a problem for her to give money to the 501(c)3.

It's only a problem if the 501(c)3 is giving money back to her.
posted by alms at 6:23 PM on February 6, 2012 [1 favorite]


Board members of nonprofit 501(c)3s are expected to give charitably to them. It is normal and expected. It is only self-dealing if the nonprofit then gives your aunt money or goods in return, or if the nonprofit gives your aunt's company favorable contracts without a proper vetting process and the contracts were not in the best interest of the organization. (Note, it is not self-dealing if her company gets a contract with the nonprofit because it truly offers the best services. They just have to disclose it.)


Is there some reason you think this is unusual or illegal? Do you have reason to believe that your aunt is involved in something illegal? Donating to charity is not dodging taxes.
posted by juniperesque at 6:36 PM on February 6, 2012


Keep in mind that charitable donations are only deductible on taxes - they are not tax credits. Say your aunt is in a 25% income bracket. If so, she spends a dollar on donations to save a quarter in taxes. Donations reduce taxes, not eliminate them.
posted by saeculorum at 8:27 PM on February 6, 2012 [1 favorite]


My aunt seems to make very large donations of her income to the same 501(c)(3) charity that she is the secretary and treasurer of. This seems highly unusual to me...

Why?

has anyone ever heard of such a thing? Is it legal?

Yes and yes. Many small non-profits are started, funded, and run by the same person.

Or is this just something that all the "smart money" people are doing as a way to dodge taxes, and I've only just now heard about it?

No. This is what people who want to do charitable things with their money do, if they want to actively manage how the money is used. It's also what people who would like to work for a charity do when they can afford to create their own charity.

Perhaps you have only heard of it because your aunt is the first person you know who has done it, but in the world of charities, this is very common.

You're allowed to draw a market rate salary from a charity. You're also allowed reimbursement of certain expenses that are incurred on behalf of the charity (travel promoting its mission, for instance).
posted by zippy at 2:35 AM on February 7, 2012 [1 favorite]


Along the lines of the folks asking you why this seems unusual, I would simply think that she is seriously devoted to the cause of her charity.
posted by IndigoRain at 8:27 AM on February 7, 2012


Basically, this question depends on what the OP means (or understands) by "laundering". Laundering money generally means changing its nature by shuffling it through different entities, like proceeds from illegal gambling being used to "purchase" dry cleaning services at an inflated price which are then deposited into a bank legally.

If the money is being legally donated, and used properly by the charity, this is legal. It's one-way. If the charity is then being used to transfer money or its value back to the donor, that is, a two-way street, then this is self-dealing and laundering.

Note that it's possible for a charity to pay its staff unreasonably high salary, which is morally sketchy but technically legal.

Another common and completely legal situation is for someone to be paid by a charity and donate their salary back to it.

IANAL. TINLA.
posted by dhartung at 12:58 PM on February 7, 2012


She donates $98,000 to the nonprofit organization --- a really gigantic check. But gets paid $128,000 as the secretary, and also $128,000 as the treasurer. Something super-fishy about it.
posted by shipbreaker at 11:20 AM on February 17, 2012


She gets money and gives a bunch back? As far as I know, this is legal. The board of the non-profit has set a salary, the IRS sees this salary and is ok with it, and then she gives some of the money back as a donation.

You can view it as a benefit for the non-profit, rather than laundering on your relative's part. But I'll leave it to CPAs to say whether there's some way for your relative to benefit more from the donation than from simply keeping the money.
posted by zippy at 3:21 PM on June 8, 2012


Those salaries? I'm going with my earlier summation of "morally sketchy but technically legal". Compare.

In one view, the view my father had as the staff director of a museum, was that the officers and board were tasked with fundraising. Certainly they weren't paid. I recognize that this is not a universal, but any payment given to officers involves a level of conflict of interest that wouldn't pass many ethical standards in the industry. It is, however, legal.

Without knowing more (than we can, really) about the purpose of the non-profit, however, it's impossible for us to evaluate whether it is meeting appropriate goals that satisfy its mission and, just as importantly, its donors. That is really supposed to be one of the responsibilities of the board itself.
posted by dhartung at 2:13 PM on June 9, 2012


Another way to look at it is that she's giving back 98k of her salary. My ex-wife was in a non-profit theater group and all of the actors were paid, but then donated all of their pay back to the company because they couldn't afford to actually pay the actors!
They walked away with nothing except a deduction.
posted by lee at 10:39 PM on June 11, 2012


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