DATELINE: January 3, 2011, Chicago
Over a month ago we read several articles about Bobby Thompson, the U.S. Navy Veterans Association, and allegations of a massive fraud. We were initially attracted to the story, hoping to gain more insight into internal controls, but the facts offer few such insights. Apparently the charity in question was a shell, used to defraud members of the public. There has always been fraud and unfortunately there always will be fraud. Rather than perpetuating a fraud against a charity from the inside, this scam was directed at the public
Jeff Testerman and John Martin of the St. Petersburg Times have written a lengthy article offering some reasons why the alleged fraud may have been so successful—purportedly raising $100 million. Navy Vets Made an Unchecked Rise Into Elite Circles (December 27, 2010). Much of what Testerman and Martin report is...
The Desktop Guide is Quickly Becoming the Must Have Guide for Nonprofit Executives
Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good, has quickly become the go-to guide for nonprofit executives and advisors. So what are people saying about the Guide? In the October 2007 edition of the The Federal Lawyer, New York lawyer George W. Gowen and nonprofit authority, wrote:
Some of our readers have followed the link to the Amazon.com Web site, but apparently have not bought the Guide. If they were turned off by the price, they should reconsider. One prominent attorney in the exempt organization field grabbed a review copy of the Guide and couldn't put it down. She has instructed a number of her clients to buy it, pointing out to them that for less than 1/2 hour of her billable time, they receive a lesson (and resource) that tells it like she would like it told. If you are starting a new charity, the Guide could save you thousands of dollars in legal fees by teaching you how to better utilize your legal counsel and framing the issues so you don't spin your wheels at $400 an hour.
true, but many quoted in the article implicitly assign the blame to the wrong parties.
Those quoted in the article—a Stanford University study and professor—focus on the IRS, suggesting that its review of applications for exempt status are lax-almost nonexistant. That explanation is far too simplistic.
Tax practitioners and the public complained for years about the perceived slow speed with which the IRS acts on applications for tax-exempt status. In responding to those complaints, the IRS adopted a triage system that has reduced the processing time significantly. No one, however, should mistakenly assume that this process involves an audit. It doesn’t. Let’s not forget, the IRS doesn’t approve exemptions for tax-exempt status. It recognizes tax-exempt status. When it reviews an application, it is examining the information submitted under penalties of perjury. It is not conducting an audit of the representative facts. We would argue that there is a need for such an “audit,” but the only way that this will ever be possible is if Congress provides the IRS with adequate funding for such intensive reviews and if advisors and their clients are willing to live with longer processing times and a more intrusive review. Undoubtedly, many of these folks would complain about regulatory burden if there were more in-depth reviews.
There is a balance between too much and too little government intrusion/regulation. If the allegations turn out to be true, then the loss of $100 million is the cost that our society pays for the current level of government regulation. Bottom line: We get the government we pay for.
If there is blame to be assigned, a good portion of it can be assigned to the those who donated to the U.S. Navy Veterans Association. Members of the public need to do some due diligence before giving their money to a charity. Just because “children” or “veterans” is in the charity’s name doesn’t necessary mean that the charity is efficient or legitimate. The same holds true for charities with “cancer” or heart disease” in their names. There are plenty of good charities addressing the needs of children, veterans, and those with cancer or heart disease. If someone wants to fund one of these causes, they should look for a charity with a clear and established track record. There are a number of rating organizations that can help potential donors identify these organizations.
As of January 3, 2010, we have a Congress that is far less comfortable with government regulation. We won't take a position on whether that is a good or bad thing. However, we do note that to the extent we eliminate regulation, members of the public will need to be more self-reliant in terms of protecting themselves from fraud. That may be a price of bringing down the cost of government.
Testerman and Martin also note the large number of charities with “veterans” in their name—we aren’t sure whether these are all technically charities. We have long advocated for fewer charities. Do we really need over 59,000 organizations that serve the needs of veterans? We strongly suspect that there is a lot of wasteful redundancy--unnecessary organizational overhead. As the story about the U.S. Navy Veterans Association demonstrates, that redundancy waters down regulatory efforts. It is a lot easier for a regulator to monitor 100 charities than a 10,000.
The article also recognizes that the states have a role in charity regulation. Many states require organizations that solicit charitable contributions to register, file annual reports, and undergo audits. The problem once again is regulatory resources. As the Testerman and Martin article points out, the states collect the information for thousands of charities, but simply don’t have the information to review it. Moreover, when somebody suggests lowering the threshold for audits, the charitable sector complains about compliance burden. Once gain, we get the government we pay for. If state legislatures are uninterested in allocating resources to state charity bureaus, then nobody should be surprised by an occasional fraud.
In the end, the allegations regarding Bobby Thompson and the U.S. Navy Veterans Association are unfortunate, but perfectly predictable. You can bet that there will be similar incidents in 2011.
Happy New Year.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
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