Senator Seeks Review to Find Out Whether Charities ‘Defraud Taxpayers’

By HARVY LIPMAN

The investigative arm of Congress is examining how charities spend and raise funds, along with how good a job the Internal Revenue Service does monitoring those activities. The General Accounting Office began its inquiry this month at the request of Sen. Charles E. Grassley, an Iowa Republican and the ranking minority member of the Senate Finance Committee. It expects to complete its report by the spring.

In his letter to the accounting office requesting the study, Senator Grassley cited news articles that raise questions about the accuracy of charities’ tax filings and the misuse of donations, especially by organizations that promise to grant the wishes of sick children. He also said he thinks that many charities have been used “as vehicles to defraud taxpayers who believe they are contributing to a worthwhile cause.”

The senator added that he’s concerned that the I.R.S., which is charged with enforcing the tax laws that cover nonprofit organizations, is not doing an adequate job of oversight. “I question whether the I.R.S. is best utilizing its resources to detect fraudulent charities,” he wrote. The Internal Revenue Service has not commented publicly on the inquiry.

Mr. Grassley has asked the accounting office to answer five questions:

• How much money have the nation’s charities spent on charitable programs during the last five years, compared with how much they spent on fund raising and administrative overhead?
• When charities tell the I.R.S. that they have expenses for such activities as newsletters or direct mail that are designed both to raise funds and educate the public, how much of those costs are allocated for fund raising and how much for education?
• What is the I.R.S. doing to ensure that charities comply with federal tax laws and regulations? Specifically, Mr. Grassley wants the report to include the number of times the service has revoked charities’ tax-exempt status in the last five years; the number of audits of charities it has conducted during that time; and the number of organizations upon which the I.R.S. has imposed fines under a law designed to crack down on people who receive improper financial benefits through their involvement with nonprofit groups.
• How is the service monitoring charitable solicitation over the Internet to prevent fraud?
• How can the I.R.S. improve its enforcement of tax laws dealing with nonprofit organizations, particularly when it comes to working more effectively with state regulators?

Among the articles that Mr. Grassley cited in his request to the accounting office: The Chronicle‘s analysis of informational tax returns filed by big charities, which found that one-fourth of organizations report that they spent nothing to raise charitable funds (The Chronicle, May 18, 2000).

Nonprofit groups have mixed views about what difference the inquiry could make.

While the senator’s request suggests a broad inquiry into charities’ financial activities and I.R.S. oversight of them, a lobbyist for Independent Sector said she thinks the senator is focused narrowly on improving efforts to combat fraud.

Patricia Read, vice president for public affairs at Independent Sector, has discussed the inquiry with Republican staff members of the Senate Finance Committee.

“Where the committee appears to be headed is to figure out how to get appropriate oversight of the regulations that are in place right now,” she said. “They don’t appear to be talking about a lot of new regulations.”

However, Lee M. Cassidy, executive director of the Direct Marketing Association’s Nonprofit Federation, said he is more concerned about the review. He says Mr. Grassley’s comments may put pressure on the G.A.O. to publish a report that is critical of charities.

“The senator seems to be tarring the nonprofit sector with a very broad brush,” Mr. Cassidy said. “He’s made a number of sweeping statements that appear to challenge the G.A.O. to produce a study that proves his suppositions. I’m concerned whenever somebody in a position like that says, ‘There’s a lot of dirt out there. Now go find it.’”

Scrutiny of IRS

Some observers predict that Mr. Grassley’s questions about the Internal Revenue Service could lead to a debate over how best to fight fraud among charities.

Mark B. Weinberg, a Rockville, Md., lawyer who represents nonprofit organizations, said he doubts that the I.R.S. is the appropriate agency to combat the sort of fraud Mr. Grassley is concerned about. That, he argued, should be left to federal, state, and local law enforcement. Mr. Weinberg said he is concerned that the study will lead to onerous regulation of “people who are living by the rules.”

The ability of the I.R.S. to ensure that charities are living by the rules has been weakened in recent years, said Marc Owens, a former director of the service’s Exempt Organizations Division who is now a lawyer in Washington. I.R.S. figures show the number of days agents spent examining tax returns of nonprofit groups fell from 46,728 in 1998 to 34,045 last year.

Mr. Owens said the G.A.O. may have difficulty gathering some of the data the senator requested because the I.R.S. does not have a computerized database of the returns filed by tax-exempt organizations.