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Posted by Admin Posted on Feb 16 2011

Charities to set up so-called "supporting organizations".  These are tax exempt entities set up to solicit funding for other tax exempt organizations.  These kinds of organizations can also be set up by third parties.

The IRS has been investigating these third party organizations ("Friends of" groups), and has begun aggressively revoking their tax exempt status.  A number of the revocations were aimed at organizations involved with Merrill Scott & Associates. Ltd.  The firm is in receivership after being charged by the IRS for operating a Ponzi scheme.  The principals were charged with tax evasion and money laundering in 2008.

The most common abuse involved donations to the supporting organization, for which the client would claim a charitable deduction.  The organization would shift the funds -often through offshore entities - and eventually return the money to the donor or a relative through an interest free loan.

The 2006 Pension Protection Act requires mandatory minimum payouts for "Friends of" supporting organizations.  Treasury has proposed a 5% minimum (the same as for private foundations), but the American Bar Association objects that the rate is too high.