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Thread: Policing the nonprofit sector

  1. #1

    Policing the nonprofit sector

    The nonprofit sector is growing much faster than the rest of the economy and IRS is playing catch up.

    IRS has been under funded in all areas of enforcement for some time but the office of exempt organizations (IRS/TGEO) is getting a budget boost thanks, in part, to the the use of nonprofits for money laundering by terrorists but also because of concerns by lawmakers like Senator Grassley who believe the sector is out of control and in need of reform.

    When we think of nonprofits many of us think of volunteers in community service and organizations like the local food shelf. But most workers in the nonprofit sector are well paid employees with benefits and those at the top are earning salaries that rival the compensation of private sector corporate CEOs. Until recently, the Service has had to concentrate on very large nonprofits such as HMOs because they had few agents to go around and they had to pursue cases that had the largest potential return (penalties). Consequently, smaller nonprofits with total assets of a million dollars or less had a very slim chance of being audited.

    In recent years a practice known as "mission shopping" has come to bear on the sector in which nonprofit entrepreneurs with little or no experience in an educational, scientific, religious, or other charitable mission apply for tax exempt status and pursue funding sources. An example might be an English Major with no training in social work who decides that she wants to open a batttered women's shelter because funding sources are available in her community and there is little competition. She might apply to receive Community Development Block Grant (CDBG) money or other government grants in order to attach to a government revenue stream. Her organization will usually have a very professional sounding name and in the grant application she will portray herself and her staff as caring experts meeting a desperate need in the community. In many cases, con artists like her first make political connections such as backing a mayoral or city council candidate before they make their move.

    Once our nonprofit entrepreneur has established herself she will guard her revenue stream jealously and show up year after year with glowing self reports on her program services and emotional appeals to continue her funding in order to save the lives of her needy clients. Eventually, annual funding becomes almost automatic and the organization is treated like a quasi goverment entity.

    Another common device in nonprofit mission shopping is the forming of nonprofit cartels made up of associate organizations in which members sit on each others boards and recommend each other for funding. They appear like a group of separate organizations and are often able to lock up every source of charitable funding, particularly government grants, in a community. When competitors for funding show up they are attacked, slandered, and undermined to the point that they give up in frustration

    With a cartel firmly in place the circle of nonprofit directors can live much more comfortably than they could in the private sector. When you try to reach them a secretary will say they're in a meeting, or at a conference, and you will rarely find them in the office five days per week. Minions take care of business while they vacation at the beach or lounge around at home. They only show up for appearance's sake and then retreat to their cushy little lives.

    Because the crooked directors hold the purse strings and control the board of directors it is easy for them to book modest salaries and then book phony expenses to supplement their income. They might purchase a dozen phantom computers or other nonexistent items, anything to rack up the cash. Padded expense accounts, company cars, and expensive "business trips" are also common perquisites for dishonest nonprofit executives, but the biggest benefit of all is cadillac health care and handsome retirement benefits. Nobody can own stock in a nonprofit corporation but who needs to own shares when they can build up a retirement account that will make them much better off than the average private sector small business person who has had to deal with debt, taxes, creditors, etc. and only has a small nest egg when he retires and sells his store.

    Hopefully the party is over. IRS estimates that more than half of all nonprofit 990s (federal returns) are inaccurate and they are going to come down hard on self inurement and excess benefits in small and midsized nonprofits. Board members of nonprofits who ignore their fiduciary responsiblilties may be in for a rude awakening when they discover that their trusted manager has been embezzling for years and submitting fraudulent financial statements resulting in hefty fines for the organization and the loss of tax exempt status.

    If you suspect a nonprofit of cooking the books here's what you can do: You are entitled to see any nonprofit's last three years 990s (financial reports to IRS) and determination letter (permission to operate for tax exempt purposes) during normal business hours Monday though Friday. Copies of the documents for public inspection must be kept in offices where the nonprofit has two or more employees. Nonprofits must immediately comply with your request and they can't ask you to identify yourself or ask why you want to see the documents. You are not entitled to see their donor list. If you are flatly refused with no explanation the nonprofit will be cited for willful noncompliance and fined thousands of dollars. And an audit letter is likely to follow that.

    If you know that a nonprofit's 990s are fraudulent contact your IRS office of exempt organizations. They will gladly take your information or complaint but they cannot legally tell you if they intend to investigate.

  2. #2

    Re: Policing the nonprofit sector

    An interesting thing that happened to me:
    One time during the summer I went to my uncle's (who works for the IRS) house for a week. One day I walked over to a CVS to pick up the newspaper, and my uncle couldn't find his wallet. He thought I stole it to have money for the newspaper, and when I got back he asked me if I stole it. But then I pointed to the kitchen counter, and there it was. He apologized to me, and said, "I work for the IRS, I think everybody's stealing."

  3. #3

    Re: Policing the nonprofit sector

    Register to remove this ad.
    You're paying for hundreds of billions of dollars in annual tax evasion. Congress keeps arguing about marginal rates and does litttle or nothing about eliminating abusive tax shelters and other tax evasion schemes.

    All that uncollected money would go a long way toward reducing the deficit.

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