Grassley Launches Investigation of Misleading Charities

WASHINGTON – Sen. Chuck Grassley, a leader of the Committee on Finance, has asked
the General Accounting Office to investigate deceitful charities that pocket donations instead of
devoting them to charitable acts and receive undeserved tax breaks.

“Americans give generously to charities,” Grassley said. “They deserve assurances that their
donations are going toward legitimate charitable activities. Deceitful charities are a social blight.
They drain money from real needs. The IRS should shut them down.”

Grassley asked the General Accounting Office to investigate tax records that will help to
determine the reach of deceitful charities, as well as whether the IRS is doing enough to discern
deceitful charities from high-performing charitable organizations. Grassley expects a General
Accounting Office report in several months.

Grassley’s letter to the General Accounting Office follows.

Via Facsimile (202-512-9096) and Regular Mail

The Honorable David M. Walker
Comptroller General
U.S. General Accounting Office
441 G Street, N.W.
Washington, D.C. 20548

Re: GAO Request, 501(c)(3) Charities Audit

Dear Mr. Walker:

Charitable contributions in the United States exceeded $203 billion last year, up 3.2 percent
from the previous year, adjusted for inflation. The Internal Revenue Code (IRC) exempts charities,
also known as Section 501(c)(3) entities, from federal income taxes. This exemption rests on
performing some charitable purpose as well as meeting other conditions. The Internal Revenue
Service’s (IRS) Tax Exempt & Government Entities division charges 850 employees with approving
and overseeing more than one million tax exempt entities, including more than 750,000 charities.

Given the enormous funds contributed to an ever-expanding number of 501(c)(3) tax-exempt
organizations, it is not surprising that a number of these organizations are not used for the charitable
purposes for which they were created, but rather as vehicles to defraud taxpayers who believe they
are contributing to a worthwhile cause. These so-called charities raise millions of dollars in
donations through misleading and otherwise questionable fund-raising tactics, but they spend only
a small percentage of those amounts, if any, on legitimate charitable activities. Instead, contrary to
what donors are generally led to believe, the bulk of the donated funds is used to pay exorbitant fundraising
fees as well as excessive salaries, consulting fees, and other administrative expenses.

The problem appears to be particularly prevalent in the field of charitable wish-granting
organizations. Perhaps because of the compelling nature of their mission, such organizations appear
to be especially prone to exploitation. Although there are many credible and ethical wish-granting
organizations in the United States, a number of unscrupulous individuals have apparently found
raising money to grant sick children’s wishes to be pretexts for fraudulent and deceptive fund-raising
practices. A recent USA Today article reported that one such organization spent “not one cent” of
the almost $3 million it raised through telemarketing on actually granting wishes. Four other wishgranting
charities profiled in the article spent a combined total of less than $2.8 million of the $31.4
million in contributions they took in collectively on wish fulfillment, amounting to less than 9
percent of total contributions. States have been investigating and prosecuting questionable wishgranting
organizations and other charities that have mislead donors or misused donated funds.

Additionally, the Internet has opened up endless fund-raising possibilities for both large,
well-established charities and small, recently-formed charities. Soliciting on the Internet has raised
millions of dollars for charity, but has also opened new doors for fraud. Because of its rapid growth
and increasing visibility, the IRS must consider the enormous potential for abuse by fraudulent
501(c)(3) entities that solicit on the Internet.

I question whether the IRS is best utilizing its resources to detect “fraudulent” charities or,
at a minimum, to detect false reporting by approved 501(c)(3) entities. The IRC requires every
organization that is exempt under its section 501 with gross income in excess of $25,000, with
certain exceptions, to file an annual, informational return (Form 990) to itemize certain income,
receipts, and disbursements. However, a significant number of the IRS Forms 990 filed by approved
501(c)(3) charities contain material omissions, misrepresentations or falsifications.

Similarly, numerous charities are not complying with IRS rules and are misleading the public
about how charitable donations are being used. Last year the Chronicle of Philanthropy reported that
more than one-fourth of the nonprofit organizations that received $500,000 or more in gifts from
private sources failed to report any fund-raising expenses on their Forms 990 for tax year 1996. This
failure to report is amplified by the fact that those organizations received more than 90 percent of
the total donations that charities of all s reported to the IRS. The Chronicle reported that
improperly reporting find-raising expenses “is likely to have few, if any, consequences for a charity.”

Although most charitable organizations are worthy organizations that deserve to be
generously supported, it is unfortunate that many are fraudulent, employ deceptive solicitation
practices, or mislead the public by submitting false or inaccurate Forms 990. Example after example
of charities misusing funds for improper or illegal purposes necessitates congressional action.
Accordingly, I request that the General Accounting Office study how charities use their funds and
how the IRS oversees such uses. Specifically, I request a study to address the following questions:

1. How much have charities spent for charitable purposes (i.e., program services) as
compared to fund-raising and “management and general” purposes during each of the
last five years? Please organize the information by the type of services such charities
provide.

2. Many charitable organizations report on their Forms 990 joint costs that are allocated
to both fund-raising and educational activities. For charitable organizations that
report joint costs, how much is allocated for fund-raising and how much to
educational activities?

3. How does the IRS ensure compliance by charities with federal tax laws and
regulations? Please include in your response the following information:

a. The number of revocations of 501(c)(3) status in the last five years.

b. The number and type (i.e., using a classification code of the National
Taxonomy of Exempt Entities or otherwise) of 501(c)(3) entities audited in
the last five years.

c. The percentage of charities audited in the last five years.

d. The number of 501(c)(3) entities upon which the IRS has imposed
intermediate sanctions as a result of an audit or an examination since
implementation. Also, please provide the number of intermediate sanctions
the IRS has imposed, and the number that the IRS collected in the last five
years.

4. How is the IRS monitoring charitable solicitation on the Internet, with particular
regard to efforts to prevent fraud?

5. What procedures should the IRS implement to improve its enforcement of taxexempt
organizations? Specifically, in what ways could the IRS work with state
regulatory agencies to oversee the nonprofit arena more efficiently and effectively?

As you proceed with this request, I appreciate your keeping my Committee staff informed
of your progress.

Sincerely,

Charles E. Grassley
Ranking Member

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