May 24, 2012

Raising Billions for Charity Without Spending a Dime

A report by Scripps Howard found that thousands of nonprofits raised billions while reporting ‘zero’ expenses

Is it possible for a nonprofit organization to raise a million dollars without spending a dime? How about hundreds of millions?

In their latest reports to the IRS, 15,398 large nonprofits said they had raised nearly $117 billion without spending anything for advertising, telephone solicitations, mailed donation appeals, professionally prepared grant applications or staff time for face-to-face pleas for contributions, Scripps Howard News Service reported Monday.

The Scripps study identified 22,598 nonprofit groups that did report fundraising expenses totaling some $14 billion, or about seven cents for every dollar raised.

By law, nonprofits owe no federal taxes on any funds they raise.

Scripps examined the latest annual Form 990s, documenting expenditures in 2010, 2009 or 2008, of 37,987 nonprofits that collected at least $1 million. Chief executives sign these reports to the IRS, affirming their accuracy “under penalties of perjury”—though legal action for a false filing is rare, Scripps said.

Industry experts told the news service that an accurate statement of fundraising expenses is critical to donors’ understanding how much of their contribution goes to a charity’s officially stated purpose.

Lois Lerner, director of the IRS’s Exempt Organizations Division, told Scripps that a Charitable Spending Initiative is underway to look at fundraising costs and other indicators of tax rule noncompliance. “We are very, very interested in that,” she said.

Nonprofits have a strong incentive to underreport their overhead costs, Scripps said. United Way, for example, recommends against making donations to groups that spend more than 25% of donations for overhead expenses.

The study found that nearly one-third of Goodwill Industries’ 127 major affiliates reported raising a total of $387 million at no cost. The organization, like others contacted by Scripps reporters, said it would rethink its reporting practices.

“It is important to be clear and transparent,” Goodwill Industries International president and CEO Jim Gibbons said. “If this is even perceived as misleading, well, that’s not what the Goodwill brand stands for.”

Smaller charities also acknowledged underreporting of overhead expenses, Scripps reported.

The report said it had turned up a number of charities that were able to make compelling arguments for “zero” overhead costs because unpaid volunteers had raised the funds. But most underreporting groups had a hard time defending the practice, it said.

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