My father-in-law, Joe, alerted me to a peculiar ad in the business section of the Sunday New York Times. Under the listing “Business Franchise Opportunities” were the words, “Charity Director Millionaire,” followed by a South Florida phone number. “This sounds pretty fishy,” Joe said. I agreed. And so I decided to pick up the phone and go fishing.
“Hello?” says the husky, male voice on the other end. No name. Just, “Hello?” It sounds like a personal cell phone.
“Yeah,” I say. “I’m calling about the ad in the New York Times. I’m wondering: How’s that all work?”
“Hold on!” And I can hear the guy shuffle off to a more private space.
He never does tell me his name, and I never tell him mine. He doesn’t ask me where I’m calling from or why I’m interested.
He starts right in with his pitch. “So for years I worked for a company that raised money for charity,” he says. “We did alright. More than alright. $60,000, $80,000 a week. Now we kept a lot of it and passed the rest on. I mean, we weren’t one of those outfits that kept 98% or anything! It was all on the up-and-up!
“So then I tell myself, ‘Why raise the money for another guy’s charity when I can raise it for my own?’ So I started this charity. It’s for handicapped kids. And I’m looking for people to run the franchise in different cities.”
Franchise?! I’m repelled. But I’m curious. “How’s it work?” I ask.
“So let’s say you become one of my people. You go out and get different businesses to contribute $5,000 each. In exchange they get a charitable deduction, plus I’ll shoot a t.v. ad for them – you see, I also have a video business. That in and of itself is a great deal for them, right? And then, well, depending on the volume, you personally keep 30% or 35% of what you raise for yourself. I can show you the numbers. I did this in Canada, and here, too – I have dual citizenship. You can make real money. I’m not kidding you.”
I can’t quite follow it all. I don’t really want to. I say, “So, the charity you’re creating: What’s it do?”
Short pause. “Well, we send sick kids to Disney World. Get them wheelchairs. That kind of stuff.”
He adds, “If you’re interested, the next step is to come down and meet me in Miami. We’d get to know each other. And I can set you up with my lawyer, and he’ll explain how this is all legal.” Yeah. All on the up-and-up, fella. You’re a great humanitarian.
End of call. I feel like I need a shower.
If this guy were the only one, it would be no big deal. But there are thousands of charity scam artists out there. Ken Stern, in his book With Charity for All, talks about “charities” that are nothing more than a P.O. Box, a phone bank, and names liberally littered with words like “children,” “cancer,” “veterans,” and “firefighter.”
You’ve probably fielded calls at home from these outfits. How do they get charitable status to begin with? Well, according to Stern, the I.R.S.’s Tax-Exempt Division is woefully understaffed. They aren’t able to do much more than give a sniff to new charitable entities – and so the I.R.S. approves over 99.5% of applications. And how many corrupt pseudo-charities do they subsequently shut down? Only about ten a year, nationally. In other words, it’s easy to get charitable status, and once you do, it’s almost impossible to lose it.
There are state charitable trust regulators as well. We have a very good unit in my state of New Hampshire, but I know that in some states there’s not much enforcement at all. And I’m pretty sure that none of these offices is deep with staff.
My would-be business partner in Miami and his ilk fleece donors and taxpayers (who subsidize their scams through the charitable tax deduction) and cast a dark shadow over the entire nonprofit sector. So what’s to be done? First, we should all do our best to turn the scoundrels in. In this case I did call the I.R.S. An agent there provided me with a form to send in, but without Mr. Miami’s name and address, I really couldn’t fill it out. Next time I’m in that situation, I will press for more information. And I urge you to do the same. We should also lobby for the I.R.S. and state regulators to get the resources they need to rein in a system that’s out of control.
Second, let’s publicly acknowledge that there are some people purporting to run charities who are bad guys, pure and simple. We shouldn’t ignore the specter of immoral and corrupt individuals who are using the charitable tax code for personal benefit. They’re a rotten bunch trying to scam the system. My sense is that a lot of folks – certainly the ones who keep sending money in response to shady phone solicitations – have no idea that some charities are rackets. The exploited donors need to understand what’s going on.
At the same time, the public needs to know that real nonprofits are very different: driven by mission and doing good work. Largely because of the scam artists, faith in the nonprofit sector has dropped in the last decade. It’s time to rebuild the sector’s image.
And if you’re wondering: no – I’m not going to Miami. Though given the weather this winter, it’s pretty tempting.
Copyright Alan Cantor 2014. All rights reserved.
Thanks Al. I just watched a friend think about giving money to a charity supposedly helping hungry children. (I did not see the appeal, only heard him talk about it.) The appeal included 15 cents in the envelope and the recipient is supposed to send the charity money. I saw my friend briefly think about donating but then rip up the form after noting that they could trace his name/address through the return envelope. So many variations of the scheme….
Deplorable. I think we forget how easily good people can be conned by these immoral few (relative to the actual nonprofits doing the work they claim they are). I know someone from college who I ran into a few years ago. She started a nonprofit and when she heard I worked in the sector said “nonprofit can be VERY profitable!”. Not sure if I should have been complimenting her on her entrepreneurship or condemning her for her wicked misuse of community funds.
Recent applications for 501(c)3 show the IRS doing a very dilligent job in reading, rejecting and carefully studying Form 1023 before granting non-profit status. There is also the reporting form http://www.irs.gov/pub/irs-pdf/f13909.pdf that you mention. I would really like to see a numeric claim to the IRS being severely understaffed in their tax exempt department because I just don’t see that (and the statement opens the door to inviting more fraud). Their response time and holds times have been respectable, staff knowledgeable, and actions swift enough for their size and structure. You also make a statement “but I know that in some states there’s not much enforcement at all. And I’m pretty sure that none of these offices is deep with staff.” Hmmm…. ending with a summary that faith in the non-profit sector has dropped in the last decade. Not sure how that jump was made.
Thanks, Wendy, for raising these points.
All of these assertions I make about the quality of the I.R.S. and state nonprofit enforcement come from Ken Stern’s With Charity For All: Why Charities are Failing and a Better Way to Give. (Stern had been CEO of National Public Radio.) There are several parts of his book that I disagreed with: Stern’s take on the nonprofit sector was overly dire and suspicious, I felt, and he’s too dismissive of the impact that organizations have. He’s also a bit too neatly prescriptive as to the solutions, and too trusting of some new techniques for evaluating impact. However, I found the book to be extremely well researched. Stern (like all of us) occasionally piles on the evidence to support his thesis, but I haven’t found much criticism of his research method and facts. His chapters on nonprofit scamming were relentlessly revealing — and all of the examples he gave were very well documented, including a number of cases in which even some of the most outrageous abuses did not get the organizations removed from the I.R.S. approved charity list.
That the I.R.S. is overwhelmed by the regulatory demands came up recently in the political dust-up about the 501-c-4 “public benefit” organizations. Though these groups, whose rapid growth was spurred by the Citizens United case, are not 501-c-3 charities, they are, like the charities, overseen by the same I.R.S. tax-exempt unit. There was much comment at the time that if the cases were handled in less-than-perfect manner (I’m not offering an opinion here as to whether that was the case), it was largely because of cut-backs and low staffing levels in the department.
As for the state regulation, Stern cites N.Y.U. Professor Harvey Dale, an authority on charitable regulation, as saying, “In most states, the Charity Bureau of the Attorney General’s office is inactive, ineffective, understaffed, overwhelmed, or some combination of these.” (That quote comes from Marion R. Fremont-Smith’s Governing Nonprofit Organizations from Harvard University Press.) That seems pretty authoritative to me.
As for the citation that faith in the nonprofit sector has dropped, Stern takes that from a 2006 NBC News poll, so that’s somewhat less authoritative, I must confess, and had I followed the footnote to the source I wouldn’t have included that assertion in my post. You can find polls that give all sorts of results, depending on the wording, and one here or there doesn’t have much validity. But I have to think that scandals in the nonprofit world — and there have been many — and the stories of excessive executive salaries at hospitals and universities (something Stern and I have both written about) have the effect of eroding the public trust.
Finally, I don’t want my comments in any way to imply that the actual individuals working at the I.R.S. or the state regulatory bodies are doing anything other than their very best. I’ll even attest that when I called the I.R.S. to report Mr. Miami, my call was routed properly and answered promptly, and the man with whom I spoke was professional, competent, clear, and supportive. I think the woman who has effectively run my state’s nonprofit division is one of the great public servants I have met, and her tiny department does a simply remarkable job of both regulating the nonprofit sector and offering very real and helpful support and training. Staff members are doing their best. But at the I.R.S. and in many states, there simply aren’t enough people doing that work.
Thank you again for weighing in, Wendy! Write again, please!
Some remarkably thorough investigations that were just posted about charity scams in the Tampa Bay Times. Bloodchilling. Here’s the link: http://bit.ly/1cOkGCe What I wrote about is just the tip of the iceberg, alas.