Gifts-In-Kind, Potentials for Fraud

Gifts In-Kind Potentials For Fraud
We are all familiar with how charities raise money, but sometimes charities will also hold events to raise donations of food, property, clothing, equipment, home goods, supplies, etc.  These are considered donations of “gifts-in-kind”.  
Individuals and businesses can donate products to charities which, in turn give the products to those in need.  The organization could also give the products to other charities for redistribution, like thrift stores or relief organizations.  Gifts-in-kind can be just as important to a charity’s program as gifts of money.  
Although there are tax provisions in place that have been designed to provide an incentive for in-kind donations it has come to light that some organizations take advantage of donors’ good intentions in two areas: the valuation of donated goods, and the actual use of the donated goods in programs that serve the needy.
A charity is required to include information of support received from the public or other sources on their IRS Form 990, how money was spent, and what its assets and liabilities are.  A charity’s spending is divided into three categories: program service expenses, management and general expenses, and fundraising expenses.  A charity can report the fair value of a gifts-in-kind received as donated revenue, and the value of the gifts-in-kind it distributes as a program service expense if certain IRS set criteria is met.  
Incorrect reporting of these gifts can make a charity look more successful than it really is, and can also serve to hide any wasting of useful resources.  Reporting false numbers can also inflate a charity’s donation and program expense numbers to make them more attractive to donors, grantors, and other public support.  Inflating program expenses can serve to minimize excessive fundraising and administrative costs, making them appear to be a smaller percentage of expenses than they really are.  This could serve to increase a charity’s rating on watchdog sites such as BBB Wise Giving Alliance, GuideStar, or CharityWatch.
False reporting can occur in a few different ways.  A charity can mark up the value of goods, they can assign some value to goods that are worthless (a machine that has missing parts), or they can take credit for the value of a gift-in-kind that was simply redistributed to another organization, in which case they would have never had ownership of the gifts but merely posed as a middleman.
Most charities report gifts-in-kind correctly but as a donor it is our responsibility to do some research and ask some questions before we give.  Check the charity’s website and social media pages.  How are their programs described?  Check their financial statements (you have the right to see them!)  Schedule M of the IRS Form 990 should contain information about gifts-in-kind.  If these numbers are high be cautious.  Ask the charity how these gifts are being used to support its mission.
When used as intended gifts-in-kind can benefit everyone.  The charity’s purpose gets fulfilled, donors may be able to get a tax deduction, and items that may have otherwise been discarded can be used to satisfy the needs of others in unfortunate situations.
(Compiled from Gifts-In-Kind Donations: How they can be used to deceive,
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