Nonprofits Face Regulation, Enforcement From Several Areas.
A big scandal always grabs attention. But when nonprofits fall under the gun of the state charity official, attorney general or other regulators, they can be slapped with any number of infractions.
While state charity officials claim that a national compilation of fines and enforcement is not kept, a spot check by The NonProfit Times shows states being aggressive.
For example, The Connecticut attorney general's office recovered $827,314 for the fiscal year between July, 2000 and June, 2001. Of that, $86,000 was paid in the form of civil penalties while $741,000 represents other fines and reimbursements. Part is money paid to rightful charities due to some misrepresentation misrepresentation
In law, any false or misleading expression of fact, usually with the intent to deceive or defraud. It most commonly occurs in insurance and real-estate contracts. False advertising may also constitute misrepresentation. by a third party. The second big area was funds raised but spent for purposes other than the donor's intent.
Some cases include large amounts. "We defended a will from an heirs' contest that saved a $7.7 million charitable bequest bequest: see legacy. ," said David Ormstedt, an assistant attorney general in Hartford, Conn. "In June, a final action on the funding of a $134 million health care conversion foundatio took place."
Misrepresentation of solicitation solicitation
In criminal law, the act of asking, inducing, or directing someone to commit a crime. The person soliciting another becomes an accomplice to the crime. The term also refers to the act of obtaining bribes, as well as to the crime of a prostitute who offers sexual can be exemplified by a case against a children's charity. The charity raised funds by mail and reported its need to buy medical equipment for sick children. However, according to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the nonprofit's IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. Form 990, the major activity of the organization was for public education. "The total money they reported on medical expenses was only 2 percent," Ormstedt said.
The attorney general's office settled the case by having the charity pay $40,000 divided evenly between a civil penalty and the balance to other child-oriented charities.
"Most of the time we try to work things out without the court system," he said. "Sometimes they get caught red-handed and agree to settle up."
In one case, the Connecticut attorney general's office went after a board president who started a building scheme with a contractor. The contractor never completed the work and no bids had been taken on the proposed work.
"Money was exchanged and the contractor split it with the board president," Ormstedt said. "That infraction Violation or infringement; breach of a statute, contract, or obligation.
The term infraction is frequently used in reference to the violation of a particular statute for which the penalty is minor, such as a parking infraction.
INFRACTION. would not have happened if the board paid attention to what was going on."
But such blatant action is not the norm. Most of Ormstedt's activity is heavily weighted on the negligence side, he said.
Ormstedt explained it's hard to know the extent to which the state's intervention works. Many boards are weak and miss areas of conflict of interest. The actual work done by the state could represent just a fraction of the problems because many never get reported.
These examples of legal activity only portray Connecticut. Other regions may face different issues.
One area starting to affect organizations is the new accounting standard SOP 98-2 from the American Institution of Certified Public Accountants Certified Public Accountant (CPA)
An accountant who has met certain standards, including experience, age, and licensing, and passed exams in a particular state. (AICPA AICPA
See American Institute of Certified Public Accountants (AICPA). ). The procedure deals with filing financial reports of joint allocation of programming and fundraising that records direct response expenses.
The accounting calls for certain portions applied to fundraising and a certain portion for program, explained Seth Penman, principle at Penman & Perlman, New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of City-based attorneys who defend nonprofits around the country.
The legal problems aren't in the form of a penalty. "The infraction becomes a lawsuit because it's considered fraudulent," he said. "The state is taking a position that if you don't apply the accounting appropriately, the result is misstating your financial position."
While no court actions have yet hit, investigations are going on. Should an organization fail in the suit, the results could require some assurance that the organization would operate differently. "It's possible the organization could pay tens of thousands of dollars with significant fines on top of that," he said.
This depends on the focus of the attorney general's office. "We don't pay much attention to the SOP 98-2," Ormstedt said. "No one can control it, but there's nothing you can do about it. For us, it is a waste of time and we have other things to work on."
Daniel Moore Daniel Moore (born 1940 in Oakland, California) (known as Daniel Abdal-Hayy Moore or Abd al-Hayy Moore) is an American poet. He became a sufi Muslim in 1970. He now lives now in Philadelphia, Pennsylvania. , registrar of charitable organizations This article is about charitable organizations. For other uses of the word charity, see Charity.
A charitable organization (also known as a charity) is an organization with charitable purposes only. for the attorney general's office in New Mexico New Mexico, state in the SW United States. At its northwestern corner are the so-called Four Corners, where Colorado, New Mexico, Arizona, and Utah meet at right angles; New Mexico is also bordered by Oklahoma (NE), Texas (E, S), and Mexico (S). and president of the National Association of State Charity Officials (NASCO NASCO North Atlantic Salmon Conservation Organization
NASCO National Account Service Company LLC
NASCO National Academy of Science Committee On Oceanography ), expects to see the SOP 98-2 as a critical issue for the NASCO's upcoming conference.
"SOP 98-2 has always been an issue for state charity people," he said. "This is an accountability issue since we have the IRS Form 990 on the 'Net. The numbers should stand for something."
Moore explained that NASCO wants to see how other states are reacting before it determines the approaches that will work best.
New Mexico's office focuses on registration and charitable oversight. With a concentration on solicitation misrepresentation issues or directors' misuse, its attention has eyed a number of hospital conversions from nonprofit to for-profit. The area is known for a volatile business activity in healthcare.
"We have a Blue Cross being sold as a nonprofit," he said. "We want to make sure a fair value helps the beneficiaries such as the Medicaid population and that the funds continue to be devoted to the healthcare mission."
Possible changes in such situations could turn assets from health care dollars into funds for other uses. Moore explained that some nonprofits could use incoming funds for the arts or culture.
Enforcement issues could really be different than what is usually perceived, explained Geoffrey Peters, a volunteer general counsel for the American Charities for Reasonable Fundraising Regulation. The organization is known as the Litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.
When a person begins a civil lawsuit, the person enters into a process called litigation. Coalition made up of 400 charities and fundraisers in Arlington, Va.
Peters's office once requested a list of nonprofits prosecuted in Pinellas County, Florida Pinellas County is a county located in the state of Florida. Its county seat is Clearwater, Florida6, and its largest city is St. Petersburg. The county is contained entirely within area code (727), except for sections of Oldsmar, which has area code 813. . Peters expected to find charity fundraisers prosecuted for failure to registrar, or for late registration. He also expected to find many citations for fraud.
Peters said that he received back nine citations for soliciting in a road way and all nine pertained to the same organization. A church was asking people to go into the street for donations and failed to obtain a license.
"No one ever got prosecuted for fraud, or misuse of funds," he said. "What you perceive to be the issues and what issues are being addressed can be very different."
One of the least expected places of enforcement activity is with the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. Postal Service postal service, arrangements made by a government for the transmission of letters, packages, and periodicals, and for related services. Early courier systems for government use were organized in the Persian Empire under Cyrus, in the Roman Empire, and in medieval (USPS (1) (Uninterruptible Switching Power Supply) A power supply for a computer that contains its own battery and uninterruptible power supply (UPS) circuitry. See power supply and UPS. ), yet some of the biggest cases are with cooperative mailing that involves millions of dollars.
The USPS claims ineligible mailings at the nonprofit rate happen when a for-profit fundraiser takes the risk of the mailing. The for-profit company then can not use the nonprofit rate.
"I see more and more of this type of action:' he said."The Post Office has gotten so bad there's some legislation in Congress that would remove the ability of bringing these cases."
Peters explained that the intermediate sanctions Intermediate sanctions is a term used in regulations enacted by the United States Internal Revenue Service that is applied to non-profit organizations who engage in transactions that inure to the benefit of a disqualified person within the organization. enforcement from the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. Section 4958 is taking shape. That section applies to an excess in benefit transactions, defined as transactions where a disqualified dis·qual·i·fy
tr.v. dis·qual·i·fied, dis·qual·i·fy·ing, dis·qual·i·fies
a. To render unqualified or unfit.
b. To declare unqualified or ineligible.
2. person receives a more than fair market economic benefit from taxes under Section 501(c)(3) or (4).
Recently, the IRS requested additional authority that it could use short of the "death penalty" that revokes the exemption for nonprofits. The Internal Revenue Service (IRS) would impose a tax equal to 10 percent of the excess benefit. This would be levied on any organization manager who knowingly participated in excesses. An "organization manager" specifically includes members of its board or trustees.
The intermediate sanctions regulations are getting a lot of attention from IRS enforcement officials. Peters reports that the IRS has assessed more than $40 million in intermediate sanctions excise taxes excise taxes, governmental levies on specific goods produced and consumed inside a country. They differ from tariffs, which usually apply only to foreign-made goods, and from sales taxes, which typically apply to all commodities other than those specifically exempted. against one individual who was an officer in several nonprofit home health agencies. These organizations were converted from nonprofit to for-profit status.The IRS would not confli-m the figure.
This type of action is separate from those done by the state's charity officials. A nonprofit hospital conversion could have problems with both the state and the IRS. In the case of the New Mexico activity, the state is looking at the hospital conversion because of a state law dealing with fiduciary issues. The state might not even be aware of the IRS activity because of Section 6103 which declares that the IRS does not have to let the state know about its investigation until the conclusion.
"A number of cases are now under investigation," Peters said. "This is not widespread but the amount of money is large. The penalty is technically not a fine but an excise tax Excise Tax
1. An indirect tax charged on the sale of a particular good.
2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS.
1. that depends on the size of the transaction."
Legal pitfalls are affecting organizations that use sweepstakes for fundraising. Perlman explained this area stems from problems that hit several for-profits. However, the law suits dealing with consumer protection statutes are being applied. In most cases, states want to recover the money raised during the sweepstakes along with the cost of investigation.
"I think this is an unconstitutional application of a statute," he said. "The statutes are very vague although most say that any tendency to mislead mis·lead
tr.v. mis·led , mis·lead·ing, mis·leads
1. To lead in the wrong direction.
2. To lead into error of thought or action, especially by intentionally deceiving. See Synonyms at deceive. the warrants an action."
Peters explained that sweepstakes mailings have dropped substantially because changes in the rules virtually makes them unfunctional. New rules require a specific language with disclaimers, along with restrictions on the size of the typeface The design of a set of printed characters, such as Courier, Helvetica and Times Roman. The terms "typeface" and "font" are used interchangeably, but the typeface is the primary design, while the font is the particular implementation and variation of the typeface, such as bold or italics .
"Any organization that raised 50 percent of its funds from sweepstakes feels a major impact today," he said "Revenue has dropped 20 to 25 percent with at least three charities."
Back in Connecticut, the breach of fiduciary issues by board members leads Ormstedt to say that most nonprofit board members need experience to foresee potential conflicts of interest.
Ormstedt participates with a group started by a local United Way that conducts training sessions for board members." Some people sit on boards without training," he said. "They need to read the minutes, follow the financial statements, attend meetings and view the IRS Form 990."
Enforcement strikes many organizations with fines and penalties for late registrations, explained Perlman. "This is becoming a bigger problem especially since many states don't allow extensions to file," he said.
The sizes of such penalties for failure to register range between $250 to $1,000.
Nonprofits should be aware of the types of regulations from the multiple players involved with enforcement. "I'm sorry we're in an industry so heavily regulated," Peters said. "But it comes with the job description to pay attention to the various levels of restrictions."
Tom Pope Thomas "Tom" Pope is a professional English footballer currently playing for Crewe Alexandra. Following an unsuccessful trial at the railwaymen, Pope opted to make his name in the lower leagues with Biddulph Victoria where he scored fifthteen goals in his first season is a New Yorks City-based journalist who writes about management issues.
IRS Is Not The Only Federal Watchdog
The Federal Trade Commission (FTC FTC
See Federal Trade Commission (FTC). ) should also be included on the list of agencies that regulate nonprofits. While its enforcement of the Telephone Sales Act and other FTC rules explicitly exempt nonprofits, some legal minds believe that rules may affect charities.
Some attorneys general have expressed concern that commercial-nonprofit product advertisements often send misleading messages. They complain that products often are endorsed by the nonprofit partner.
The attorneys general are concerned that some joint advertising campaigns using a respected non-profit's name and logo often fail to inform consumers enough. Information is crucial about whether the commercial sponsor has paid the nonprofit organization Nonprofit Organization
An association that is given tax-free status. Donations to a non-profit organization are often tax deductible as well.
Examples of non-profit organizations are charities, hospitals and schools. for use of its name and logo.
Some 43 states along with many local jurisdictions have a version of the "charitable solicitation regulation" as part of statutes and ordinances.
Some of these regulations are enforced by the state attorneys general. Others are enforced by the Secretary of State or other organs of state government. While these statutes are rarely used to prosecute for misleading statements, fraud or abuse, they apply fines for "failure to register" or failure to file reports on time.