PLR 201047033 involved an organization that had qualified under 501(c)(3) to provide computer materials and computer training to the poor. Upon examination of the organization’s 990 and its principal’s 1040, the IRS learned that the principal had been running a commercial business and asking his clients to make their checks payable to the organization. The principal commingled his personal funds with the organization’s funds in one bank account. And most of the checks written from the account were for personal expenses. So, the organization effectively became a “tax shelter…to conceal his personal income.” The principal claimed that there was no impropriety; rather, he received bad advice and was confused on how to properly file his and the organization’s returns.
I can certainly imagine a scenario where discrepancies on returns could all be explained by innocent good faith mistakes. Federal returns can be confusing. But this case may present the worse context for appealing to such confusion because the the principal’s side business actually consisted of preparing federal income tax returns. Not surprisingly, the IRS was not convinced and retroactively revoked the organization’s exempt status.
There are two important lessons here for all charities: (1) have your own bank account and (2) don’t commit fraud. In fact, these lessons also apply to everyday life. I’ve found that I’m much happier when I’m not committing fraud. And by setting up separate bank accounts in my family finances, I have finally found a way to manage (or at least financially cap) my wife’s purse and shoes fetishes.