IRS Handling of September 11 Charities Shows Weaknesses of Approval System, Critics Say

Less than two weeks after the September 11 terrorist attacks, the Internal Revenue Service

granted tax-exempt status to the Top of Texas K-9 Search and Rescue Association, speeding through an application process that typically takes 15 weeks or longer. Eamon P. Riley, the group’s executive director, said an IRS employee told him what to write at the top of his application to ensure that it would be processed quickly: “Disaster relief K-9 search and rescue.”

The IRS was working under a policy, announced one week after the attacks, expediting the application process for any charity formed to respond to the terrorist assault. As a result, the tax service has approved exemptions for 266 charities since September 20. Another 13 applications under the agency’s “fast track” system are pending, and the IRS is still accepting new ones.

But Top of Texas has nothing to do with the response to the September 11 carnage, and Mr. Riley’s group never claimed it did. His application made clear that the organization aims to respond to accidents and disasters in north Texas — and only there.

“We don’t bring up September 11 when we talk to anyone about our group, because we started putting this together back in May,” Mr. Riley said. “Besides, it takes 18 months to train a search dog. How could we possibly have had any dogs ready to help the rescue efforts in New York?”

The Texas charity’s experience was far from unique. While most of the charities that requested expedited processing were formed as a direct response to the terrorist attacks, at least 24 of those approved by the IRS were incorporated before September 11. Others, like Mr. Riley’s, incorporated after the terrorist attacks but had been in various stages of organization before then. In many cases, charities simply added a paragraph to their applications about a disaster-relief fund-raising event or promised to offer their services to anyone who needed them as a result of September 11, without changing their basic missions.

In other instances, organizations listed only the vaguest descriptions of their missions, or proposed seemingly implausible goals. One said it would spend $50-million to finance antiterrorism efforts, but its fund-raising plan consisted of nothing more than placing advertisements in newspapers and magazines. Another claimed it would conduct antiterrorism training for every school district in the nation. A charity planning to support victims of terrorist activities around the world and proclaiming itself to be a “global foundation” was formed by a man who is president of a Florida company that filed for Chapter 11 bankruptcy protection in December 2000 and then lost a $178,000 mortgage-foreclosure lawsuit in April.

Not Taking Chances

IRS officials noted that the service has expedited processing of applications in past disasters, and an IRS spokesman denied that the service took any shortcuts in the post–September 11 review process. The service moved applications related to the terrorist attacks “to the top of the pile” of thousands of charities seeking tax-exempt status, said an IRS spokesman, Anthony Burke, but otherwise treated the applications no differently than any others.

“We did not want to take a chance of not reviewing an organization that might do good in response to this terrible tragedy,” said Mr. Burke. “But we did not curtail the actual review process. This is the same review process as we would give any organization.”

Questions About Process

If that is the case, critics say, the handling of the expedited applications raises a fundamental question about the IRS’s capacity for reviewing the approximately 80,000 new organizations that seek tax-exempt status annually. The forms don’t elicit enough information about the proposed charitable activity, they say, and the service generally accepts at face value the information that is provided.

“What the government says to a charity is, ‘All your paperwork is taken at face value, because you signed an application under penalties of perjury and therefore we believe you to be truthful,’” said William J. Lehrfeld, a former IRS lawyer who now represents many nonprofit groups through his private practice in Washington.

In a written response to questions from The Chronicle, Thomas J. Miller, an IRS official who oversees tax-exempt organizations’ compliance with federal rules, confirmed that the IRS generally accepts the information a charity puts on its application without further investigation.

Marc Owens, former director of the service’s Exempt Organizations Division and now a lawyer in Washington, noted that the application form does not ask if anyone involved in the charity has “ever been convicted of tax fraud or using a charity for fraudulent purposes.” Mr. Owens says the IRS routinely fails to dig deeply enough into information provided on applications for tax-exempt status. “It’s an assembly-line operation,” he said.

The average time an IRS reviewer spends processing an application is slightly more than two hours, Mr. Owens said. “This is the only chance the IRS has to get a commitment from these organizations of what they’re going to do and how they’re going to do it, and they’re tossing that opportunity aside,” he said.

Mr. Owens said that theoretically the IRS could audit charities’ Form 990 informational tax returns after the organizations have begun operating. But, he added, that is not practical because the service has only enough revenue agents to audit a small fraction of tax-exempt organizations. Last year, the IRS audited 5,342 of the nation’s 1.4 million tax-exempt groups (The Chronicle, August 23).

Daniel Borochoff, president of the American Institute of Philanthropy, a group in Bethesda, Md., that grades charities on how efficiently they raise and spend their funds, said that while the government should examine new charities more closely, the IRS does not have adequate personnel or the financial resources to do so. Mr. Borochoff said he supports setting up a separate federal agency to regulate nonprofit groups, similar to the Securities and Exchange Commission, which regulates publicly held for-profit companies.

Others worry, however, about giving the government too much authority to screen applicants for tax-exempt status, arguing that exerting such power could discourage groups from setting up nonprofit organizations that promote unpopular causes.

“Asking the IRS to pass judgment on whether something is a good idea for a charity is a big leap,” said Jennifer Lammers, director of the New York Philanthropic Advisory Service at the Metro New York Better Business Bureau, which has itself been trying to evaluate charities set up in response to the terrorist attacks. “I’m not sure that should be the government’s role.”

Nothing to Do With Disaster

Whatever the government’s proper role may be, it is clear that numerous charities whose missions are unrelated, or perhaps thinly tied, to the events of September 11 nonetheless gained rapid approval from Washington. In some of those cases, officials of the charities expressed bewilderment at the accommodation they received from the IRS.

“We had nothing whatsoever to do with September 11,” said Jeri Nichols-Park, a director of Whitebird Productions, of Fort Collins, Colo., expressing surprise that the charity is on the IRS list of organizations responding to the terrorist attacks. The group was set up to promote music productions and education in Colorado.

Marilyn Sheldon, president of the Rutland Area Disaster Animal Response Team, in Rutland, Vt., expressed similar confusion as to how her group — which plans to rescue pets and other animals during natural disasters in Vermont — ended up on the September 11 list.

The president of another charity on the list said at first that he couldn’t understand how the IRS counted the group as one that was responding to the attacks.

“Our main focus is on supporting an orphanage in Bangladesh,” said Yusuf Barey, president of a charity called the Islamic Relief Agency’s Projects for the Needy, in Houston. Then he added, “I hadn’t thought of it until now, but a nice lady from the IRS asked me if we were doing anything that had to do with September 11, and I told her yes, we had raised about $1,000 on behalf of another charity, the Islamic Circle of North America.”

Dr. Barey said he sent the IRS a copy of a flier asking for donations to the Islamic Circle. A few weeks later the service approved the application of the Islamic Relief Agency’s Projects for the Needy, which Dr. Barey had filed with the IRS in April.

Other groups were more deliberate in using the fast-track status the IRS granted to charities responding to the attacks.

David W. Chowins, a lawyer representing the Animal Friendly License Plate Association, in Kansas City, Mo., conceded that the group’s mission never had anything to do with responding to the terrorist attacks. The organization is backing a bill in Missouri to allow residents purchasing license plates to pay an extra fee for an “animal friendly” emblem. The association would receive the proceeds from the fees to promote better treatment of pets and other animals. The group filed its application for tax-exempt status in July.

On October 4, Mr. Chowins said, he wrote the tax agency a letter stating that, while the group’s mission hadn’t changed, it was “attempting to develop a plan to help the rescue animals” working at the World Trade Center and the Pentagon.

“Frankly, the idea of us helping from Kansas City was pretty far-fetched, since our organization was still getting off the ground,” Mr. Chowins said. Nevertheless, the IRS expedited the application, approving it 12 days later.

Matter of Emphasis

In some cases, charities whose missions had nothing to do with responding to September 11 sought expedited processing of their applications by asserting that they were indeed raising money for relief efforts.

The Central Ohio Health Awareness Foundation, in Powell, was formed last summer, according to Andrew Mowry, a chiropractor and one of the charity’s trustees. The main mission of the group, which applied for tax-exempt status on November 2, is to provide health screenings and education programs, especially aimed, Mr. Mowry says, at overcoming “the bias the public and medical profession have against the profession I practice.” On November 25, he faxed to the IRS a copy of a fund-raising letter pledging “to raise $100,000 and hand deliver it” to a disaster-relief charity dinner December 6. The IRS approved the group’s application November 26. But Mr. Mowry said that he was able to raise just $1,700.

Other organizations formed before September 11 quickly changed their focus after the attacks.

Reacting Against Violence Everywhere, in Ozark, Mo., which incorporated in July, originally described its purpose to the IRS as preventing school violence. On October 23 its chairman, Dennis W. Davis, faxed a letter to the IRS stating that the charity had changed its focus to providing counterterrorism training in every school district in the nation. The IRS approved its application the next day. Mr. Davis, who said his background is in law enforcement but declined to say where he has worked, said the organization has no funds and plans to apply for grants from the government and other sources.

Legal and Financial Trouble

At least one charity that the IRS approved for tax-exempt status is headed by someone who has run into legal and financial problems recently.

The Scorpio Foundation, in Fort Lauderdale, Fla., was incorporated September 21 by Charles Scorpio, a businessman whose interests include real estate and high-technology venture-capital companies in Florida. The Scorpio Foundation has some of the most expansive plans among charities that applied for expedited approval from the IRS, including raising millions of dollars “to support victims of terrorist attacks around the world.”

In April, a Florida state court ruled that a company of which Mr. Scorpio is president — Zeus Properties — was guilty of defaulting on a $178,000 mortgage. Court papers state that Mr. Scorpio claimed he had paid the money to a representative of a trust that holds the mortgage on the property. He sought to back up his claim with a copy of a document he said was signed by an agent for the trust, according to court records. But the court ruled he had not made the payments that were owed and said the foreclosure could go forward.

In the midst of the lawsuit, in December 2000, Zeus Properties filed for protection from its creditors under Chapter 11 of the U.S. bankruptcy laws. The bankruptcy case was dismissed on February 16, 2001, after Mr. Scorpio failed to show up for a creditors meeting.

Hans Boy, a spokesman for the Scorpio Foundation, said Mr. Scorpio does not own Zeus Properties, and acted as its president “as a temporary measure because the president at the time of the lawsuit was under medical treatment in Europe and couldn’t be there.”

But records available online from the Florida secretary of state’s office show that Mr. Scorpio is still listed as president of the company. In a deposition in the foreclosure case, Mr. Scorpio said the company is owned by his uncle, Alfred Zeretzke — listed on the Scorpio Foundation’s IRS application as a vice president of the charity.

The full list of charities approved under the expedited policy is available on the IRS Web site, http://www.irs.gov. Once there, click on “Charities & Non-Profits,” then on “Disaster Relief, September 11, 2001.”