April 26, 2012

IRS: Embezzlement, Theft Take a Bite of Charity Assets

Preliminary study finds $170 millon diverted from 285 nonprofits in 2009, much of it through criminal means

Public charities are exempt from taxes, but they are not exempt from the diversion of their assets from their intended charitable purpose, often involving embezzlement or theft.

Now, the IRS is readying a program to address this concern, Lois Lerner, the director of exempt organizations, said in a recent speech at Georgetown University Law School.

In her wide-ranging address, Lerner focused part of her discussion on the “Significant Diversion of Assets” question on the Form 990 informational tax return nonprofits file every year. She said the Review of Operations unit in a preliminary study had examined tax filings and publicly available information on the 285 nonprofits that reported a significant diversion of assets in 2009.

Initial research found the following:

  • Analysts identified approximately $170 million in significant diversions.
  • Many of the cases involved theft or embezzlement, though in many other cases, the taxpayer did not explain the significant diversion, as Schedule O requires.
  • Several cases involved Ponzi schemes.
  • Eighty-two cases resulted in civil or criminal charges against the responsible party. These charges were brought by the organizations involved, or by local authorities; they were not IRS charges.
  • Forty-seven individuals were jailed or served probation for the diversion of the assets. Again, these dispositions did not arise from IRS actions.
  • In nine cases, restitution was paid in full.
  • In 11 cases, there was partial restitution.

Lerner said the IRS now plans to conduct an examination program in this area. “While organizations aren’t normally selected for exam based on the answer to any particular question on the Form 990, a significant diversion of assets is noteworthy and we need to get a better understanding of these events.”

She said the examinations will enable the IRS to identify common indicators of serious cases and of cases where the organization was able to self-correct. This will allow the IRS to advise nonprofits generally on how to avoid such events, and help it refine its risk models to better target its examination resources.

In many cases, an exam will home in on the details of the transaction with the goal of pursuing excess benefit transaction actions against the persons committing them.

“The examination won’t necessarily result in tax consequences to the organization itself,” Lerner said. “In some cases, the taxpayer simply didn’t provide the required explanation on the Schedule O, and we need to get that missing information. And there are some situations where the taxpayer just did not complete a Schedule O at all.”

The examinations will also determine what internal controls or good governance practices, if any, were present before the significant diversion and whether, and how, they have been enhanced or modified in response to ensure the charities’ assets are protected in the future.

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