Jail Time For Fraudulent Donor Receipts

September 10, 2014       The NonProfit Times      

A New Jersey accountant was sentenced to 18 months in prison and will be barred from working in the tax preparation business for 10 years after his release. Kellar Covington, 62, of Hillside, N.J., admitted preparing false tax returns for clients by fabricating and inflating Schedule A itemized deductions, Schedule C expenses and Schedule E losses, “such as those for gifts to charity, job expenses and real estate losses.”

The Internal Revenue Service (IRS) estimated it was defrauded of approximately $140,000 as a result of the fraudulent returns. Covington owned and operated KCJ Financial Corp., and assisted in the operation of DFC Tax Pros, Inc., both of which were tax preparation businesses in Irvington, N.J.

When it comes to issuing receipts for contributions, nonprofit financial managers must be aware of what is and is not deductible and share that information with donors. The IRS is concerned about issuing “gross valuation overstatements” or “false or fraudulent” gift receipts, according to John Taylor, principal with John Taylor Consulting in Durham, N.C. and of counsel with Atlanta, Ga.-based Alexander Haas. “The actual commission of tax fraud is something an individual does when they knowingly file a return claiming more deductions than they should,” he said.

Nonprofits are processing contributions and very frequently receipts are being issued that don’t reflect the true tax deduction of the gift, Taylor said. “Sometimes that’s ignorance. Sometimes that’s head in the sand. Sometimes it’s a vice president saying you’ll issue them this way,” he said.

“The reality is there’s an educational process that’s necessary,” Taylor said, adding that the laws for what constitutes tax-deductible contributions are a half-century old. It’s the responsibility of nonprofits to be forthcoming with that information to donors, something that became prominent in the mid-1990s after the Budget Reconciliation Act of 1993. “You’re talking two decades ago and people are still not following the law,” said Taylor, who has run a listserve (http://listserv.fundsvcs.org/) since 1994, sharing fundraising related news and information.

The IRS issued final substantiation regulations in 1996, outlining requirements for nonprofits and articulating what was and what was not deductible for contributions. Prior to that, Taylor said, all people needed was a canceled check to claim a deduction but after that required a receipt for anything more than $250 and anything for $75 or more that they received benefits in return.

Since the 1996 regulations, the IRS began putting out Publication 1771, which has been revised seven times, typically updating the annual inflationary adjustments regarding the benefits that are given.