Study: Many Nonprofits Misreporting Solicited Donations

10News Examines 2 Local Nonprofit Organizations' Fundraising Expenses

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, according to a Scripps Howard News Service study of federal tax records.

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Forty-one percent of all 37,987 charities and other nonprofit groups that collected at least $1 million according to their most recent report to the Internal Revenue Service made what experts agree is a ridiculous claim: They raised significant amounts of money without spending a dime to do so. (Click here to use a database to search a nonprofit's fundraising expenses.)

On their annual tax forms, 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 that they managed to raise a total of $116.7 billion while reporting zero fundraising expenses, according to the study. 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. (Visit GuideStar's website at www.guidestar.org.)

"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 any donation actually goes to the nonprofit's officially stated purpose.

The Scripps study found that 22,598 nonprofit groups did report fundraising expenses that totaled $14.3 billion, or about 7 cents for every dollar they 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 multi-year 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.

Ottenhoff said it's important for donors to be able to easily follow the money.

"What donors want to know is how is my hard-earned money being used? Are you using my money effectively and efficiently?" said Ottenhoff.

Expense information -- such as advertising, mailings and writing grant applications -- are part of the overhead costs and a measuring stick on a charity's performance. (To see IRS instructions for Form 990: Part IX, Statement of Functional Expenses, click here.)

In San Diego County, the 10News I-team discovered two charities that make it tough to know exactly how donations are used.

The UC San Diego Foundation and Goodwill Industries of San Diego County both received millions of dollars in contributions and grants, but reported to the Internal Revenue Service that they did not spend one penny on raising those funds.

Ottenhoff said raising money without spending money is possible, but unlikely.

"I never had somebody call me up and say, 'Hey, how would you like me to pay for your budget?' I've had to work for it, and working for it means you need to do all the things that you need to do to raise money, and that costs money to do it."

The UC San Diego Foundation reported to the IRS that its mission is "to advocate and raise private support for the University of California, San Diego, for the purposes of its research, teaching and public service mission."

10News examined its tax form for fiscal year 2010, which showed $122,838,456 in contributions and grants -- $1,812,768 of it from fundraising events. That included its annual black-tie gala benefiting UCSD's cardiovascular center. (View UCSD's Form 990 for fiscal year 2010 here: http://www-er.ucsd.edu/foundationDir/FDN-ACT/pdf/2011taxform990.pdf)

UCSD held a special grand opening celebration that reporting year, with dinner and dancing. Tickets started at $750 a person. The foundation claimed zero fundraising expenses for the gala and its other fundraising activities.

A UCSD representative wrote to 10News:

By Regents policy none of the University of California campus Foundations have employees rather all employees are employed by the UC Regents as are most University staff. Fundraising activities are handled by the campus' Offices of Development and as such the overall expenses for operation are part of the development departments -- not the campus' foundations.

All expenditures of the campus can be found for 10-11 in UC San Diego's annual report: http://www.annualreport.ucsd.edu/2012/downloads/UC_San_Diego_AR_2012_Fin.pdf Thus, the Foundation itself does not incur any fundraising costs.

When 10News examined the UCSD annual report, it listed operating expenses totaling $2.9 billion, but it was not possible to determine how much of that was spent on fundraising.

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."

Despite what Gibbons said, Mike Rowan, CEO of Goodwill Industries of San Diego County, told 10News his organization is "autonomous."

"We are very high in the percent going to program and business," said Rowan.

Rowan's nonprofit reported receiving $9,586,795 in contributions in 2010, but zero fundraising expenses.

10News asked Rowan if there was an expense involved with getting people to donate items to Goodwill.

"Absolutely there's an expense associated with that," said Rowan. "And the IRS says to put it under the business related expense."

According to the IRS instructions for Form 990, advertising for donations is a fundraising expense and should be reported as part of the overhead:

Fundraising expenses should not be reported as program-service expenses even though one of the organization's purposes is to solicit contributions. (instructions for Part IX. Statement of Functional Expenses, column (B) - Program Services)

Fundraising expenses are the expenses incurred in soliciting cash and noncash contributions, gifts and grants. (instructions for Part IX. Statement of Functional Expenses, column (D) - Fundraising)

Rowan said his auditors said otherwise.

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, like 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. "Why does anyone think we are so stupid?"

Yet the problem has been known for many years, 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 under-reporting 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."

The Julie Rogers Gift of Life program in Beaumont, Texas, two years ago changed how it reports fundraising after claiming zero expenses for years. The cancer screening and awareness program reported for the first time in 2010 that $119,000 of its $1.6 million revenue went to fundraising after realizing IRS reporting requirements.

"No, it wasn't zero," executive director Norma Sampson said of her organization's fundraising expenses in previous years. "We just didn't break it (fundraising costs) out. We now have a clearer understanding. We want to do due diligence on this."

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.

"We absolutely think this is an important issue and one well worth your time and effort," Price said. "When it comes to regulations, all regulations, IRD is very concerned with compliance."

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.

In one local example, a nonprofit's sole source of its contributions was the family who created the nonprofit. They did not ask for donations from outside sources.

"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.

"The contributions we receive are mostly generated by our (unpaid) board members. We don't have a large gift-giving base," said Cheryl Cross, director of new research development at the institute.

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.

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