Panama Foundation Scam

The Panama Foundation Scam

Just about every week someone calls asking about using a Panama Foundation as a charity.  This is known in tax circles as the Panama Foundation scam and the internet is filled with it.  Avoid the Panama Foundation scam at all costs.  It will lead you down a very bad path with the IRS.

Here’s how the call goes:  “Hey there, I’ve been reading on the internet and came across your site.  What I’d like to do is…”

By this time I already know what’s coming, but let them proceed anyway.  Just about any call which is prefaced by, “I was reading on the internet” is leading nowhere good.  There are very few sites that provide both asset protection or formation services and U.S. tax compliance.  If a company is based offshore, they can tell you whatever they want to make a sale.  If they are in the U.S. and have U.S. licensed professionals, then they follow the law first and look to make the sale second.

Ok, enough pontificating.  Back to the Panama Foundation scam.

“I want to form a Panama Foundation and operate it like a charity.  I want to make donations to this charity and deduct them on my U.S. taxes…” or something like that.

Here’s the bottom line on the Panama Foundation scam:  The Panama Foundation is not a charitable entity and can’t be turned in to a charity.  All of the websites and marketing brochures talking about this are scammers… or, worse, they believe the cr*p they are selling and are tax protestors.

The U.S. tax code is very clear.  Only donations to a U.S. licensed charity may be deducted on your personal income tax return.  That is to say, only donations to a charitable organization licensed under 501 (c) (3) of the U.S. Tax Code are deductible.  Your Panama Foundation won’t get a 501 (c) (3) license, so you can’t deduct transfers to it.  If you were to spend the time, money and effort to get a license, there would be no reason to use a Panama structure… you would incorporate in the U.S.

Even if you wanted to donate to a church or legitimate charity in Panama or elsewhere, such a donation is only deductible if that entity is licensed in the U.S.  Of course, you are free to give to anyone or any organization you like.  You just don’t get to deduct that payment on tax returns.

For example, the Red Cross is incorporated in Switzerland, as are most of the major charities.  These organizations then form corporations in the United States and apply for charitable status before taking donations.

Sometimes the Panama Foundation scam relies on the private interest foundation tax rules rather than the charity code section.  A private foundation in the U.S. allows you to donate property (usually appreciated assets) to your personal foundation.  You get to deduct the fair market value of the donation in the year given (which is why appreciated property is recommended) and then transfer a small percentage of that property to a licensed charity over a number of years.  This allows you to maintain control over the property, manage it for the benefit of a charity, and give up only a portion over time.

So, the Panama Foundation scam often takes verbiage and rules from the private interest foundation sections and applies them to the Panama Foundation.  Unfortunately, there is nothing legitimate to this analysis.  The Panama Foundation is not a private interest foundation as defined in the U.S. code and this is just a scam to sell Panamanian entities to those looking for a tax loophole.

Just last week I came across someone who took the Panama Foundation scam to a new level.  He would form the Foundation and file the charitable tax return in the United States for that entity.  This was done with the intent of confusing the U.S. IRS computers into thinking it was a legitimate charity.

He would then sell this “licensed” foundation for many thousands of dollars to someone who fell for the scam and thought they were getting a charity or private interest foundation.  Of course, the sham will be discovered some day and all the donations will be reversed.  This will mean big time tax, interest and penalties will be assessed against the buyer… and criminal charges brought against the scammer… if he can be found on the day of reckoning.

Don’t fall for the Panama Foundation scam.  The Panama Foundation is not a charitable organization as defined by any section of the U.S. tax code.  This is one of the many reasons you should only form offshore structures with a firm that provides U.S. tax compliance.