Thousands of Americans who donated to charities last year in the wake of Superstorm Sandy and the school shooting in Newtown, Conn. may not get the tax benefits they were expecting.
While many of these charities were legit, others were scams or never received the proper approval from the IRS to become a 501(c)(3) charitable organization -- meaning taxpayers aren't allowed to deduct donations to these groups.
Last month, for example, the New Jersey Attorney General filed a civil suit against the Hurricane Sandy Relief Foundation, alleging that the group had falsely claimed donations would be tax deductible.
The organization had raised more than $631,000, but had given less than 1% to victims, state officials alleged. At the same time, roughly $13,000 in donations had been allegedly transferred to personal bank accounts, according to court documents.
The foundation's website now says that it does not have 501(c)(3) status, but that it has applied for it.
The IRS would not comment on the case. The Hurricane Sandy Relief Foundation's founders, John Sandberg and Christina Terraccino, and their attorneys did not respond to calls and e-mails requesting comment.
If the IRS catches a taxpayer deducting a donation to a non-eligible organization, the filer has to pay a penalty and any unpaid taxes, as well as interest, said Mark Luscombe, principal federal tax analyst with CCH, a tax advisory firm.
Even as the Superstorm Sandy was approaching, more than 1,000 Sandy-related Internet domains had been registered. And in Sandy's aftermath, the IRS warned donors to look out for potential scammers impersonating charities, especially those claiming to be tied to legitimate nonprofits.
The IRS would not comment on how many groups actually ended up receiving 501(c)(3) status. But a search for terms related to the storm in the IRS's database found fewer than 10 organizations with the status, not including well-established regional and national organizations like the American Red Cross.
Even organizations with the best of intentions can have a difficult time attaining the status needed for donors to get a charitable deduction, said Bennett Weiner, chief operating officer at the Better Business Bureau's Wise Giving Alliance.
An application for 501(c)(3) status can take months to be processed and even then, there is no guarantee that it will be approved, explained Weiner.
Sometimes, though, the IRS will "fast track" applications received in the wake of disasters. For example, the Hurricane Sandy New Jersey Relief Fund headed by New Jersey Governor Chris Christie's wife, Mary Pat Christie, received 501(c)(3) status on Nov. 27 -- just four weeks after the storm hit, according to the state.
Meanwhile, funds set up to support a particular individual or family — such as those set up for a specific victim of the Sandy Hook elementary school shooting in Newtown, Conn. — don't qualify for tax-exempt status, said Ken Berger, president and chief executive officer of Charity Navigator.
"Sometimes people don't realize that when they are giving to a person that maybe they're going to do some good, but they're not going to be able to get a tax deduction for it," he said.
Before donating to any organization, experts recommend using the IRS search tool to determine that it is a legitimate organization that is eligible to receive tax-deductible contributions. For contributions greater than $250, donors must receive a letter from the organization acknowledging the donation.