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Springfield Business Journal Articles
Sarah Delano Pavlik and Tom Pavlik write a monthly column on legal and business issues for the Springfield Business Journal.


Their columns will be added here each month after publication.
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As those harmed by Hurricane Katrina and the recent Springfield tornados have discovered, Americans are very generous people. Each year we give billions to organizations that claim to help the poor, fund research, educate children and more. But how much of our money actually goes to the cause and how much stays with the charity? Nonprofit organizations have become big business in themselves, and there is a great deal of fraud and mismanagement. The U.S. Senate, the Internal Revenue Service and the Illinois Attorney General's office have all increased their oversight of charitable organizations to help combat this problem.

If you are interested in giving to a charity, you can find out how its spends its money by reviewing its Form 990, an IRS form that must be made available to the public and by reviewing its financial statements, which can often be found on the charity's web site. You can also go to various web sites that rate charities such as www.charitynavigator.org. Among other things Charity Navigator lists the Top Ten Inefficient Fundraisers. According to the site, Hale House in New York City (number one) spent $1.33 for every $1 it raised, and the Childhood Leukemia Foundation (number 10) spent 85¢ to generate each fundraising dollar. (This is not the same organization as The Leukemia & Lymphoma Society (www.leukemia.org), and you should keep in mind that many organizations have similar names. Be sure you know the organization with which you are dealing.)

The Better Business Bureau has published Standards for Charity Accountability and rates charities on their compliance with these standards at www.give.org. According to the BBB standards, fundraising expenses should be no more that 35% of funds raised. Another rule of thumb is that a charity should not spend more than 10% of its receipts on administrative costs. The American Institute of Philanthropy also grades charities and lists a few of its high grades on its web site (www.charitywatch.org). You can order a complete list of its grades, including its low grades, on its web site.

The Secretary of State of South Carolina issues an annual list of "Angels and Scrooges" listing the charities in South Carolina that give the most and the least to their listed cause. According to the Secretary of State, the National Veterans Service Fund, Inc. used only 2.2% of its revenue in 2005 for its charitable programs. "This organization has hired two professional fundraisers. Of the organization's total program expenses ($95,066), nearly half is salary for the executive director." South Carolina's top angel was Hejaz Charities, Inc. which gave 97.7% of its revenue to its charitable cause.

Even if a charity appears to meet high standards, there can be problems which are not easily detected. For example, according to the BBB, the American Red Cross meets all of its standards for accountability, and 91% of its revenues go toward its programs. However, there are currently allegations of serious fraud with the Red Cross' response to Hurricane Katrina. According to CBS News, "Former Red Cross volunteer and attorney Jerome Nickerson wrote a blistering investigative report made public Friday. . . Nickerson said he found widespread evidence of theft and fraud — including a veritable black market of disaster relief goods operating out of New Orleans with the knowledge of some Red Cross supervisors. Red Cross managers were definitely protecting individuals that were engaged in diverting Red Cross supplies, it was absolutely unmistakable."

In addition to lack of fiscal responsibility, charities are under increasing scrutiny from the IRS regarding inappropriate political activity. In February the IRS released a report on its examination of political activity by tax-exempt organizations during the 2004 election campaign. Organizations, including churches, that are found to have engaged in inappropriate political activity can have their tax exempt status revoked.

The IRS review began because of an increase in complaints about political activities during the 2004 election. The IRS has completed 82 examinations to date and found that 75% of the tax-exempt organizations, including churches, engaged in some level of prohibited political activity. Based on its findings, the IRS has proposed the revocation of three of the organizations' tax-exempt status.

Some of the specific examples of in appropriate political intervention include: the distribution of printed materials that encouraged members to vote for a particular candidate; religious leaders using the pulpit to endorse or oppose a particular candidate; charities endorsing or opposing a candidate on their website or through links to another website; charities placing signs on their property that show they support a particular candidate; charities giving improper preferential treatment to certain candidates by permitting them to speak at functions; and charities making cash contributions to a candidate’s political campaign.

Even with increased enforcement, however, government organizations cannot police all nonprofit organizations. Before you write a check, do some research to make sure the people you want to help will actually benefit from your donation.
Posted in: April, 2006
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