Closer look at 990s reveals hidden costs in nonprofit fundraising

Investigative Reporters and Editors, Inc. The IRE Journal, Mar/Apr 2002 by Lipman, Harvy

FEATURES

When the Internal Revenue Service issued rules in 1999 forcing nonprofit organizations to provide copies of their tax returns to the public, journalists who cover charities suddenly found themselves with access to a wealth of data previously only slightly more difficult to get their hands on than active police investigation files.

Before the new rules took effect, nonprofits were required only to make copies available to anyone who showed up at their offices to read them, which was fine unless the charity in which you were interested happened to be 1,000 miles away.

Now nonprofit groups must turn over their Forms 990 within 30 days to anyone who requests them. Most organizations' forms are also easily accessible through the Internet site run by Guidestar (www.guidestar.org), a nonprofit group dedicated to making information about charities more accessible.

But as The Chronicle of Philanthropy has discovered after years of rummaging through those IRS forms, reporters should be cautious about relying on the information nonprofits provide.

Janet Greenlee, a professor who teaches nonprofit accounting at a major university, told us that one of her research papers discovered that many nonprofits with sizeable incomes were reporting spending nothing on fundraising. That's when we decided to do a computer analysis of the fund-raising expenses reported on the 990s filed by the largest nonprofits for tax year 1996 (the most recent year for which computerized data were available at the time - data through tax year 1998 are now available). We reasoned that any charitable organization raising $500,000 or more in gifts during the year must have spent something to raise those funds.

Zero fundraising

Keep in mind that the IRS definition of what must be reported as fundraising is pretty broad. It includes, of course, the cost of hiring outside soliciting firms and the salary paid any full-time fund-raisers on staff. But it also covers the portion of any paid staff time devoted to fund-raising (including writing grants seeking money from foundations); an allocated portion of the cost of producing a newsletter if that publication includes requests for funds; the cost of publicizing fund-raising events; and the production of any fund-raising manuals or other materials.

The data we needed was obtainable from the Urban Institute's National Center for Charitable Statistics in Washington, which has CD-ROM sets of basic data filed by the nation's nonprofits. Of the nearly 5,000 organizations reporting at least $500,000 in gifts for that year, more than 25 percent reported zero fundraising expenses. In about half the cases, there were good explanations. The most common was that the charity reporting no fund-raising costs was affiliated with another nonprofit organization, which handled all the fundraising. Another common reason covered the foundations formed by state universities. The schools themselves, which as government entities don't file 990s, do the fundraising, while the foundations distribute the money from the gifts. That way, the foundations legitimately are reporting zero in the fund-raising column.

But a large number simply didn't bother to report what they'd spent on fundraising. In almost every case, the organizations' audited financial statements did list the expenses, which is an important lesson for anyone covering nonprofits: Don't settle for the 990. Ask for the audited financial statements. Charities are under no legal requirement to provide those, but you should be suspicious if they refuse. Ask them what they have to hide, and suggest that it might be worth doing a story just on the fact that a public charity receiving a tax break underwritten by every taxpayer won't release its basic financial data. To be honest, we've rarely had a problem getting any major nonprofit group to provide us with its audited financial statement.

We also obtained databases from three states - California, New York and Ohio - which require all professional fund-raisers and the charities that use them to register. We found dozens of examples of charities hiring solicitors and telling the IRS they spent nothing on fundraising.

The Zoological Society of Cincinnati, for instance, spent at least $500,000 on fundraising, including the hiring of a telemarketing company that conducted a multi-year soliciting campaign. Trinity University in San Antonio spent $2.5 million on fund-raising over three years. Both reported zero fund-raising expenses to the IRS.

Nonprofit cover-up

Some of the explanations were priceless: One group, in a classic case of Orwellian newspeak, told us that "to put fundraising in the column called fundraising would be misleading." Its argument was that since all the organization does is raise money to distribute to other charities, fundraising was its purpose or mission, and spending on a charity's primary mission is supposed to be reported on the "program services" line of Form 990. The IRS was not amused. When we passed this explanation on to a top revenue service official, he pointed out that the organization's mission is to distribute money, not raise it, and that everything it spent on fundraising should be listed as fund-raising expenses.