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Is a tax return less likely to be audited if it's prepared…

Is a tax return...

Is a tax return less likely to be audited if it's prepared by a CPA or simply a tax person? Secondly, our Rotary Club is a 401 C for we have a 401 c 3 Foundation the question is can individual members make a contribution to the 401 c 3 Foundation to be distributed to the 401 C 4 and does that money then have to go to a non-profit

Accountant's Assistant: Can you tell me where the nonprofit is registered?

Can you see my questions?

Accountant's Assistant: Has anything been filed or reported?

The Rotary Club files every year as required

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Answered in 14 minutes by:
10/12/2017
socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 40,157
Experience: Retired
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Hello...you asked:

Is a tax return less likely to be audited if it's prepared by a CPA or simply a tax person?

A: Tax returns are first examined by the IRS computer system for typical errors (calculations, missing W-2, etc.). If an error is found, it won't matter who prepared the return. However, if the return is found to have a more significant issue (such as an unusually large deduction), then the fact that a CPA, Enrolled Agent, or tax attorney, has prepared the return may cause the agent reviewing the return to decide that the deduction is reasonable. Also, if the IRS actually requests an explanation of the questionable issue, then a credentialed preparer is in a better position to explain the issue to the IRS and thereby avoid additional taxes.

Tax preparers who have no credentials are accorded little if any weight to their explanations.

Secondly, our Rotary Club is a 401 C for we have a 401 c 3 Foundation the question is can individual members make a contribution to the 401 c 3 Foundation to be distributed to the 401 C 4 and does that money then have to go to a non-profit.

A: Anyone can make a donation, and as long as the benefits of the donation are not distributed disproportionately to a member, then there is no problem with the donation. Example: One member makes a donation, and it is distributed to 100 members, one of whom is the donor. Not a problem. But, if 50% of the donation is distributed to the member who made the donation, that's a disqualifying transaction, which could result in substantial taxes and potential invalidation of the organization's tax exempt status.

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Customer reply replied 10 months ago
Thanks. Your response went to my spam. Just found it.
To clarify on #2. For example: A member wants to open a drug counseling center in his building, so he makes a $50,000 (pass through) donation to the 401C3 Foundation. The club Board approves the project and writes checks back toward the project....some checks to the member, others to contractors. The club then requests reimbursement from the Foundation up to the $50k. Does you answer change if the project is a statue or a bike park, other? Thanks

What you are describing is (IMHO) an "excess benefit" transaction, which could subject the donor/recipient to a 25% excise tax on the value of the grant from the 503(c). This could also cause the IRS to disqaulify the 503(c) from tax exempt status.

Concerning a project where the beneficiary receives little or no direct benefit to the donor (statue, bike park, etc.), as this would not be an excess benefit transaction, there would be no likely tax liability.

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer (click 3, 4 or 5 stars) -- otherwise, Justanswer retains your entire payment, and I receive nothing for my efforts in your behalf. Note: If you cannot find the rating button on your webpage, please just type in your rating in a response to this note, and customer service will apply the rating for you.

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Customer reply replied 10 months ago
Ok. So generally speaking, as long as the donor does not receive a disproportionate benefit from the donation it is O.K. to basically "launder" a tax deductible donation through a non-profit into an otherwise non-deductible purpose.I am trying to help advise our Boards of Directors when and if we should be allowing this individual to run money through our organizations. Will you please give me one more frame of reference to help make the line a bit clearer.Thank you for your help.Allen

Example:

  • A board member owns more than 35 percent of an office supply corporation. The corporation has a contract to supply all of the organization's paper needs. During the year the corporation charges the organization $100,000 for paper, but it is later determined that the fair market value of the paper is $50,000. Because the corporation is more than 35 percent owned by the board member, it is considered an insider. The corporation is subject to a first-tier excise tax of $12,500 (25 percent x $50,000 excess benefit) and must repay $50,000 plus interest to the organization. Failure to repay may result in a second-tier tax equal to $100,000 (200 percent x $50,000 excess benefit).

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer (click 3, 4 or 5 stars) -- otherwise, Justanswer retains your entire payment, and I receive nothing for my efforts in your behalf. Note: If you cannot find the rating button on your webpage, please just type in your rating in a response to this note, and customer service will apply the rating for you.

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socrateaser
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Customer reply replied 10 months ago
Got it. Thanks.
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