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 percent 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 wouldn't comment on the case. The Hurricane Sandy Relief Foundation's founders John Sandberg and Christina Terraccino, and their attorneys didn't 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 wouldn't 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.
Applications 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.
Alternatives To Disaster Relief: Hurricane Sandy And Beyond
If You Donated After Sandy or Sandy Hook, Don't Expect a Tax Break
Victims should contact FEMA Federal Disaster Assistance at (800) 621-FEMA or online at www.fema.gov/apply-assistance. Be prepared to provide all of your contact information, appropriate financial and insurance policy numbers, and a description of the state of your property after the disaster. A FEMA contractor should visit your property within a few days of your initial request for inspection; try to be present for that visit. If you are eligible for assistance, FEMA will send a housing assistance check within a week to 10 days.
After you've received the maximum amount you are eligible for in FEMA grants, you may be able to apply for a loan from the Small Business Association. Its low-interest disaster loans provide homeowners, renters and businesses with a way to offset repair costs. The loans aren't available to repair second homes -- those aren't necessities, so they aren't covered by disaster assistance grant programs. There's a loophole, though. If you have used the second home as a rental property and can verify rent charged on previous income tax returns, you may be eligible for a low-interest, extended schedule payment loan from the SBA.
This FHA program insures mortgages from qualified lenders to natural disaster victims who have suffered home damage or loss. The program centers on providing mortgage insurance so that victims don't default on their current mortgages. Victims can then use these insured mortgages to help finance the rehabilitation of their home or the purchase of a new one. With this type of insurance, no down payment on the mortgage is required: the borrower is eligible for 100% financing.
The borrower must pay closing costs and prepaid expenses, or the seller can do so, subject to a 6 % limitation on seller concessions. Borrowers will also have to pay an up-front insurance premium for the FHA mortgage insurance and monthly premiums.
The FHA offers this program for the "rehabilitation and repair of single family properties." With most mortgage financing plans, the lender will not release the mortgage proceeds unless the state of the property provides enough loan security. In the case of necessary renovations, the lender would normally stipulate that the improvements be made before green-lighting the long-term mortgage. But loans for hefty repairs, especially those after a hurricane, are costly and come coupled with high interest rates and short amortization periods.
In this case, the victim can get a mortgage loan, at a long-term fixed (or adjustable) rate, to finance the repairs with the mortgage amount based on the projected value of the property once the restorations and improvements have been completed (with consideration of the contracting work).
In the wake of disasters, government-sponsored mortgage backers Freddie Mac, Fannie Mae and the FHA will cut borrowers some slack if their homes were damaged. Lenders that service mortgages backed by the agencies are allowed to give 90 days forbearance to borrowers, removing any penalty for letting a few mortgage payments go by the wayside. To ensure additional protection for victims, the three mortgage backers may also suspend foreclosure and eviction proceedings and waive late fees.