How to avoid (accidentally) getting into trouble or scammed on GoFundMe

Booze, smokes, and food for Austin’s homeless.

This is the title of a GoFundMe campaign that recently popped up in my Facebook feed, an Austin man trying to improve the lives of his city’s homeless one beer, cigarette, and package of peanut butter crackers at a time.

God love him and the people he is trying to help.

Crowd sourcing or crowdfunding is booming. Whether you are trying to raise funds to pay for your medical bills or next vacation, sites like GoFundMe and Kickstarter can help you reach people willing to give you a few (or more than a few) bucks.

Before you start a GoFundMe campaign to finance your daughter’s gap year, here’s what you need to know to avoid getting into yourself (accidentally) in trouble.

How to avoid (accidentally) breaking tax laws

Because no one breaks tax laws on purpose, right?

Donors, don’t deduct your donation off your taxes

GoFundMe donations are not tax-deductible.

Only donations made to charitable organizations recognized by the IRS are tax-deductible. And GoFundMe is not a charitable organization.

Donations made to a GoFundMe campaign are considered “personal gifts” by the the IRS.

Beneficiaries, donations could cost you a big tax bill

The IRS has issued some big tax bills to people who have received large sums of money on GoFundMe.

Why? Money raised through crowdsourcing sites such as GoFundMe is processed through third-party entities. These third party processing entities are required to report to the IRS any series of transactions over $20,000 involving more than 200 transactions. The IRS sees the report and expects to see that income reported somewhere on the beneficiary’s return.

If the money had come from a qualifying charitable organization, the income would be considered non-taxable. But remember, GoFundMe is not a charitable organization.

So what should you do if you are blessed to be the beneficiary of a successful GoFundMe campaign?

Keep detailed records of how you use the funds (e.g., for medical bills as described in the GoFundMe campaign description) and consult with a CPA to see how to properly report the donations on your tax return (and argue that the donations should be excluded from income as gifts). This is an area of the law that is still developing so definitely seek the advice of a professional.

How to avoid (accidentally) getting scammed

Not everything you read on the internet is true.

The good news is GoFundMe is on the look-out for fraudulent campaigns, a unique group of military, law enforcement, and philosophers dubbed the “Trust and Safety Team.”

And donations are protected if they are not delivered to the intended beneficiary or donors were misled by the campaign organizer. In other words, GoFundMe will refund donations (and deliver up to $25,000 to the intended beneficiary). Provided, of course, that you have complied with their terms and conditions. For more on GoFundMe’s guarantee policy, click here.

But to avoid having to invoke GoFundMe’s guarantee on the back-end, be proactive on the front-end with a little due diligence:

How is the campaign organizer related to the intended recipient of the donations? If they are not family or close friends, red flag.
Are family and friends making donations and leaving comments? If not, red flag.
Is the intended recipient in control of withdrawing the funds? If not, red flag.

How to avoid (accidentally) going to jail

Simple. The funds raised in a GoFundMe campaign must go to the intended recipient to be used for the purposes described in the campaign. If either one (or both) is not done, it’s a crime (money by false pretenses, theft by conversion, theft by deception, wire fraud, money laundering, etc.).

Raising money to pay off your medical bills? Don’t use the money to pay off your mortgage.

If you started a GoFundMe campaign for something for yourself, what would it be? No judgement. If it were me, it would be to pay for someone to do my family’s laundry AND put it away. Four kids + two adults = hours and hours spent on laundry each week. Leave a comment or send me an email.

Please read my disclaimer.

Tags: GoFundMe