The Best Way to Curb Charity Fraud

The Best Way to Curb Charity Fraud

According to Dean Zerbe (“Fighting Nonprofit Abuses,” June 9, 2005), I would fall into the Luddite category of nonprofit professionals who seek to understand why new legislation and regulation are needed when enforcement of existing Federal rules is so lax.

So-called charity fraud, which is actually fraud committed against charities or by individuals and organizations falsely claiming to be charities, is already against the law and can be prosecuted under fraud statutes.

Abuses of deduction allowances by donors has traditionally been an issue between donors and the IRS. Charities have no control over a donor’s tax situation, the key factor affecting deductibility of a donor’s gift to an eligible nonprofit. Charities can improve documentation and receipting of gifts without sweeping Federal legislation.

The use of tax deductibility by donors is a constantly evolving field based on the core tenet that donations to charitable organizations should be deductible, within limits. It is the limits that are at debate, not deductibility per se.

Meanwhile, the IRS’s exempt organizations (EO) section is being asked to regulate charities and the other nonprofits it has traditionally monitored, plus the proliferation of 527 political organizations, with little, if any, increased manpower or budgetary support.

The IRS’s EO enforcement capabilities are already seriously stretched. In fact, an Internal IRS study of nonprofits and charities reported on in 2002 (“Making Oversight a Priority — Federal report nudges IRS toward review of charity rules”, June 13, 2002) includes the following quote from me: “What the IRS seems to be doing is saying, ‘We’re just going to go out and study a bunch of stuff until 2008 and see if what we come up with results in something we can do anything with.’” The IRS study will take so long, he added, that “it has the effect of postponing any meaningful use of the Form 990 for charities regulation until at least the next decade.” It would be interesting to know the current status of this internal research project, which the GAO criticized three years ago as lacking focus or specific goals.

If it will take several years to figure out how to use the current Form 990 effectively, how will the IRS develop and implement new regulations based on additional legislation — as proposed by Mr. Zerbe — effectively and in any reasonable timeframe? How much will such new enforcement capacity and regulation cost? Who will pay the bill? Will Mr Zerbe’s “solutions” really help, or only exacerbate the problem?

If there are holes in nonprofit accountability, I’d like to see more effort spent on plugging existing holes and improving the seaworthiness of the nonprofit accountability ship before we add more ballast in the form of new rules and