This story was first published in several E. W. Scripps company newspapers including the Evansville Courier & Press on May 20, 2012.
Thousands of nonprofit organizations in the United States misreport how they solicit billions of dollars in donations, making it impossible for Americans to know how their gifts are used.
Forty-one percent of all 37,987 charities and other nonprofit groups that collected at least $1 million made what experts agree is a ridiculous claim: They raised significant amounts of money without spending a dime.
On their annual tax forms reported to the Internal Revenue Service, these 15,389 nonprofits said they spent nothing for advertising, telephone solicitations, mailed donation appeals, professionally prepared grant applications or staff time for face-to-face pleas for contributions.
Even so, these groups reported they managed to raise a total of $116.7 billion while reporting zero fundraising expenses, according to a study of federal tax records by Scripps Howard News Service. By law, nonprofits do not owe federal taxes on any funds they raise.
Robert Ottenhoff, president and CEO of the nonprofit oversight group GuideStar, which provided the financial data for the Scripps study, laughed when told of the finding.
“It is ridiculous to think an organization could raise significant amounts of money without spending money to do it,” said Ottenhoff, former chief operating officer at the Public Broadcasting Service for nine years. “I must be doing something wrong. I’ve never seen it growing on trees.”
Ottenhoff and other watchdogs say an accurate statement of fundraising expenses is critical to understanding how much of a donation actually funds the nonprofit’s officially stated purpose.
The Scripps study found 22,598 nonprofit groups reported fundraising expenses that totaled $14.3 billion, or about 7 cents for every dollar raised.
Some experts express indignation that major charities would claim to spend nothing on raising money.
“This is just outrageous,” said Marion Fremont-Smith, senior research fellow at Harvard University’s Hauser Center for Nonprofit Organizations. “If they say zero — and it cannot be zero — then that is a misreported tax form. And there are penalties for that.”
Chief executives of nonprofits sign their annual Form 990s to the IRS promising “under penalties of perjury” that the information provided is “true, correct and complete.” However, legal action for a false filing is extremely rare.
“I am concerned when organizations do not file correctly,” Lois Lerner, director of the IRS’ Exempt Organizations Division, said in an interview.
Lerner declined to speak directly about large nonprofits that report zero fundraising expenses. But she pointed to a multiyear study she began in 2010 at IRS to review how charities raise and use donations to accomplish their stated charitable purposes.
“What I can tell you is that I have a Charitable Spending Initiative that looks at fundraising costs, along with other indicators of potential noncompliance with the tax rules. We are very, very interested in that,” Lerner said.
Several nonprofit groups said they will examine their reporting practices as a result of the Scripps study.
When informed that 48 of Goodwill Industries’ 127 major affiliates reported raising $387 million at no cost, Goodwill Industries International President and CEO Jim Gibbons said the charity will rethink how it calculates its overhead costs in reports to the federal government and the public.
“We are going to have a dialogue within the Goodwill network so that each Goodwill and the boards of directors can become very aware of this issue,” said Jim Gibbons, who was paid $463,000 in 2010 by the Rockville, Md., organization. “It is important to be clear and transparent. If this is even perceived as misleading, well, that’s not what the Goodwill brand stands for.”
Nonprofit groups are under enormous pressure to report low overhead costs — the total they spend on administration and fundraising — in the often-fierce competition for donations. Some charitable groups, such as United Way, recommend against contributing to nonprofit organizations that report overhead expenses greater than 25 percent of donations.
“They are fudging the numbers, and there is great incentive to fudge the numbers,” said Christine Manor, a certified public accountant from Rockville, Md., who advises GuideStar and other nonprofits in how to report to the IRS.
Yet the problem has been known at least since the mid-1990s when the IRS began compiling and publicly releasing data from the Form 990 income-tax statements that most large nonprofits are required by law to file annually.
“This has been a long-standing area of concern,” said Washington, D.C., attorney Marcus Owens who was director of the IRS’ Exempt Organizations Division for 10 years. “It may be that, in some places, money falls from the sky. But personally, I’ve never witnessed that. There are enormous pressures on charities to minimize expenses.”
The rate of zero-expense reporting by nonprofits was studied by scholars at the Washington-based National Center for Charitable Statistics and the Center on Philanthropy at Indiana University, which concluded in 2004 that underreporting of fundraising is “a major concern in the nonprofit sector.”
But their findings received little attention by the press or public.
“In retrospect, we probably should have been more press savvy” to mobilize concern about the problem, said Tom Pollak, head of the National Center for Charitable Statistics, which also made its data available to Scripps.
Scripps reporters around the nation are contacting nonprofit groups, asking chief executives to explain why they listed no fundraising expenses. When pressed, it is common for those leaders to quickly concede that they may have failed to follow the reporting rules.
“Right, right, right. I see what you are saying,” said the Rev. Donald Roberts, president of the Goodwill Industries affiliate in Sarasota, Fla. ” If our practice needs to be changed, then we’ve got to change the practice.”
His Goodwill affiliate raised $32 million in donated goods that were sold at the group’s retail stores in 2010. The affiliate reported no fundraising spending costs, although Roberts admits he and his staff spend considerable time asking people to donate goods, money and to make Goodwill a recipient in their wills.
“Our traditional donated-goods operation is a business paradigm. We don’t see it as a fundraising effort. In our minds, we’ve segregated the two,” said Roberts, who was paid $334,000 in 2010. “This is a great issue to raise, and I appreciate you doing it.”
Other, smaller nonprofits are also quick to concede on the question of inaccurate reporting.
“We certainly are doing fundraising. I think it is more in how it (the cost) has been categorized,” said Sharon Conard-Wells, who was paid $93,600 in 2010 as executive director of the West Elmwood Housing Development Corp. in Providence, R.I., which reported $1.4 million in revenue in 2010 to provide quality housing for disadvantaged people.
She admits to being uncomfortably aware how much attention is paid to a nonprofit’s reported overhead.
“That’s why I didn’t want certain things included as overhead, as administrative, that my accountant told me were,” Conard-Wells said. “I was very cognizant that nobody wants to see more than a certain percentage, that people want to see that their money went to program.”
Not all nonprofits concede to underreporting fundraising expenses, however.
Officials at Washington, D.C. -based International Relief and Development defended their IRS reports documenting their work in more than 40 countries “to help reduce the suffering” in “impoverished and, in many cases, dangerous” locations. The group reported no expenses tied to raising the $13.9 million collected by IRD-US and just $14,300 in expenses for the $706 million raised by IRD Inc. in 2010.
“That’s primarily grants or contracts with government groups like organizations at the United Nations,” said IRD-US senior adviser and former chief financial officer Sandy Owens. “These are not fundraising efforts with the general public.”
Owens said none of the work by IRD staffers to prepare grant requests or to seek contracts from governments around the world should be reported as fundraising. “It is a business development expense,” he said.
International Relief and Development’s 401-person staff has an Advancement Department that produces online “fundraising tips” advising people how to host “neighborhood events” to assist in disaster relief. The group’s Business Development Department works “to identify funding opportunities from national and multilateral donors,” according to spokeswoman Melissa Price.
But Price declined to identify how many people work in the Business Development Department or the size of its budget.
Even though Owens defended his outfit’s reporting as accurate, Price said it is important for nonprofits to clearly report expenses.
Not all of the nonprofits that report zero fundraising expenses are in noncompliance with federal reporting requirements, the Scripps study found. Some made a compelling defense that “zero” was the right thing to report because unpaid volunteers raise funds.
“One of the ways is that I work virtually seven days a week and I get paid for two days’ work,” said Geoffrey Gee, executive director of the Institute for Myeloma and Bone Cancer Research in West Hollywood, Calif. “That’s one way we limit costs.”
The group reported raising $1.3 million in 2009 at no cost.
Yet the Scripps study — which was based upon the most recently available IRS report which documented nonprofit expenditures in 2010, 2009 or 2008 — generally found that most nonprofits have a hard time defending the absence of fundraising expenses.
And Ottenhoff, chief of the watchdog group GuideStar, warned that nonprofit organizations are in danger of breaking their “social contract” with America’s donors and with the government that grants them a special status.
“In return for not paying income taxes, getting the tax-exempt status, they have an obligation to tell their donors how they are spending their money, to be transparent about it, to be accountable,” Ottenhoff said.