Non-Profit Legal Matters

The Blog of the Law Firm for Non-Profits®

Nonprofit Embezzlement Finally Stopped After 40 Months

EmbezzlementWendy Harper started to embezzle from her nonprofit employer within four months of assuming her duties as payroll supervisor. She wasn’t caught until 40 months later.

During her time as acting payroll supervisor at Harvest Management Group, a nonprofit that manages 18 properties for the disabled and elderly, Harper used her position to embezzle almost $600,000. She did this by giving herself raises and claiming 1.2 million miles worth of mileage reimbursements. This would have meant her driving 30,000 miles per month while working a desk job.

In February, she pleaded guilty to one count each of theft from federal-program funds and filing false tax returns. On Monday she was sentenced to a two-year prison term. She was also ordered to repay the money she embezzled and to pay about $125,000 to the IRS for filing the false income-tax returns. She could have been sentenced to up to 13 years in prison and received a fine of up to $500,000.

The Department of Housing and Urban Development and the IRS found that because of the embezzlement, Harvest Management is having trouble maintaining its 900 units and paying property taxes.

If you are a reader of this blog, you know that this isn’t the first and certainly won’t be the last time a nonprofit has suffered at the hands of an embezzler. The NonProfit Times has reported that the typical nonprofit organization loses 5% to fraud each year and that the median loss suffered from occupational fraud is $140,000.

Has your nonprofit suffered embezzlement? What was done about it?

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New IRS Phone and Email Scams

scamsThe IRS is warning of phone and email scams targeting individuals and businesses.

First, scammers have been making calls claiming to be from the IRS. They may say that a taxpayer owes money or is entitled to a large refund. Even worse, some of the scammers are threatening arrest or revocation of the taxpayer’s driver’s license. The calls may be followed by other fake calls from state agencies.

The IRS will always send taxpayers written notification of any tax due by mail. The IRS never asks for credit card, debit card, or prepaid card information over the phone.

If you are at all unsure about a call “from the IRS,” don’t provide any personal information. Instead hang up and report the incident to the Treasury Inspector General for Tax Administration here or call 800-366-4484. In addition, report the scammers to the Federal Trade Commission using the “FTC Complaint Assistant.” Add “IRS Telephone Scam” to the comments of your complaint.

Taxpayers have also been receiving emails that seem to be official IRS notices. The emails include links that recipients are instructed to click on, which lead to web pages where personal information is requested.

The IRS does NOT initiate contact with taxpayers by email, text, or any form of social media to request personal or financial information. Do not respond to these emails and especially DO NOT click links included in them. Instead, forward the scam emails to the IRS at

Find out about more scams here. What punishment do you think befits these scammers?

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IRS Makes Progress on Exemption Application Backlog

BacklogAt the beginning of 2014, 15% of the exemption applications still on backlog with the IRS were more than one year old. The IRS Tax-Exempt and Government Entities Division (TE/GE) announced this week that the division has since closed 97% of those cases.

According to TE/GE’s deputy commissioner, Donna Hansberry, the division is “on pace to close almost all the aged inventory by the end of calendar year 2014.” They are working from oldest application to newest to get this done.

So what has been the hold up? Hansberry blames it on the auto-revocation. Specifically, the automatic revocation required when an exempt organization fails to file an information return for three consecutive years. She explained that more than 577,000 exempt organizations were automatically revoked for failure to file and the IRS has since reinstated almost 34,000. Of the exemption application received last year, about 30% were for reinstatement.

On top of that, Hansberry noted that since 2010 exemption applications have increased significantly while in the same time period TE/GE staffing has decreased.

At The Law Firm for Non-Profits, we’ve experienced the backlog reduction first hand. In the last two months, we’ve received a large number of determinations filed more than a year ago. Indeed, as of this posting, we only have three applications submitted more than a year ago still outstanding.

Tell us if you’ve been waiting more than a year for your determination. Have you heard anything from the IRS? What have been the consequences to the organization of having to wait a year or more for exemption?

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Does Your Nonprofit Pay Its Payroll Taxes?

According to a recently released report from the Treasury Inspector General for Tax Administration (TIGTA), although most exempt organizations pay their federal taxes, more than 64,200 of the nearly 1.7 million organizations recognized as exempt (or 3.8%) had nearly $875 million of federal tax debt as of June, 2012. This included payroll taxes, unrelated business income taxes, excise taxes, penalties and interest.

Most of the exempt organizations owed less than $10,000 each. But about 1,500 exempt organizations owed more than $100,000 each, with some owing more than $10 million each.

Unpaid payroll taxes and related penalties and interest constituted almost $600 million of the amount owed (about 69%). TIGTA recommended that the IRS Exempt Organizations (EO) Division help detect those exempt organizations that fail to pay payroll taxes, but the EO Division rejected the recommendation. After all, the EO Division has enough to worry about.

What does this mean for your exempt organization? Remember that even if your organization is exempt from paying federal income taxes, it is not exempt from paying payroll taxes and other federal and state taxes. Check with your accountant or tax professional to make sure your organization is complying with all applicable tax regulations.

The federal government is on the lookout for noncompliance, even if the EO Division wants no part of it. The IRS isn’t authorized to revoke tax-exemption based on an organization’s failure to pay payroll taxes, but the IRS could decide to base future audits on an organization’s failure to pay payroll taxes.

And this is not limited to the IRS. State payroll tax agencies, such as California’s Employment Development Department, also are targeting exempt organizations for failure to pay payroll taxes. At the state level, individual officers and employees sometimes can be held personally liable for an exempt organization’s failure to make payroll withholding payments.

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Does the Ice Bucket Challenge Leave You Cold?

downloadIt is likely that videos of people dumping buckets of ice water on their heads has filled up your Facebook and other social media newsfeeds in the past few months. And not just anyone. Participants include Bill Gates, LeBron James, and Taylor Swift.

So what’s it all about? In short, people are “nominated” to complete the ice bucket challenge, post it to their social media sites, and then challenge others to do the same within 24 hours or make a $100 donation to the ALS Association. Many who accept the challenge both carry it out and make a donation. The purpose is to raise money for and awareness of amyotrophic lateral sclerosis (ALS), more commonly known as Lou Gehrig’s disease.

Since July 29, donations to the ALS Association have reached $13.3 million as compared to only $1.7 million in the same period last year. That includes about 260,000 new donors.

But the trend is also receiving a lot of backlash. Arielle Pardes, a writer for Vice, complained: “There are a lot of things wrong with the Ice Bucket Challenge, but the most annoying is that it’s basically narcissism masked as altruism.” Pardes calls this type of stunt “hashtag activism” in the vein of Livestrong bracelets and Kony 2012. Many are encouraging people just to donate instead of taking the challenge.

Have you taken the challenge? Post a link to your challenge video in our comments section below.

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The NY Salary Cap Saga Continues

In April we told you that that the Nassau County State Supreme Court in New York ruled that Governor Andrew Cuomo had overstepped his authority when he issued an executive order putting a cap on executive salaries at state-supported nonprofits to $199,000 unless the charity secures a waiver from the state to pay more. Last week a New York State judge ruled in favor of Cuomo’s executive order.

The case was brought by Concerned Home Care Providers, a trade association whose members are home health care agencies. Suffolk County Supreme Court Justice Emily Pines ruled that the cap was within the authority of the health department, which was implementing the order. Justice Pines explained that the health department had the authority “to regulate the financial assistance provided by the state in connection with public health care activities.” And based on past rulings, Justice Pines added: “Where an agency has been endowed with broad power to regulate in the public interest, we have not hesitated to uphold reasonable acts on its part designed to further the regulatory scheme.”

Justice Pines also noted that it wasn’t truly a cap. The regulations only limited the amount of state funds that could be used for executive compensation. The regulations did not in any way restrict or limit the use of other funds for payment of executive compensation.

Now all eyes are on another lawsuit on the cap filed in Albany County by the New York State Health Facilities Association, which is still pending.

How would your organization respond if the government imposed a salary cap? And how would your senior executives respond?

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A New Charity Reporting Option

There are many resources for finding out information about a nonprofit. The best option is to review an organization’s documents yourself. But if you don’t have time for that, where should you go for reliable reporting on nonprofits?

The Direct Marketing Association Nonprofit Federation (DMA) is hoping you will turn to their new Nonprofit Dashboard. The Dashboard’s content will come directly from nonprofits and will include 3 years of reporting across 8 metrics, including constituents served, program expenditures, and expenditures to acquire and cultivate donors.

DMA is an association of nonprofits and charitable fundraisers that focuses on providing education about fundraising. DMA has long been at odds with third party reporting sites like Charity Navigator and CharityWatch.

So what do the charity watchdogs think of nonprofit self-reporting? You guessed right, they are not impressed. Vice President of Marketing at Charity Navigator, Sandra Miniutti, argued against use of the site, explaining, “[t]here’s no independent scrutiny or analysis which would provide a benefit to a donor.”

But is this an instance of the pot calling the kettle black? There has been mistrust of some of DMA’s members, who are sometimes thought of as merciless direct marketers. But there has also been mistrust of the rating systems used by watchdogs like Charity Navigator.

DMA believes that the watchdogs don’t always portray a fair view of fundraising efforts and focus too much on the short term. Instead, the Dashboard will look to longer term data about fundraising efforts and programmatic achievements. DMA has an ethics committee that will investigate if a member is accused of misrepresenting financial information on the Dashboard.

Where do you look for information about an organization before you donate?

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Should Your Nonprofit Accept a Donation to Build?

constIs your nonprofit considering constructing a new wing or building based on receiving one substantial donation? Before it does, the board should consider all possible outcomes, including ending up in court.

Helga Wall-Apelt, a former board member of Florida State University’s Ringling Museum of Art, contributed $6 million to the museum in 2006 for a new center for Asian Art. She also contributed the use of her collection of jades, bronzes, sculptures, and photographs worth $30 million. In return, the new center was to be named for Wall-Apelt.

Almost 9 years later, construction has just begun on the new center. It has been delayed several times as the museum sought matching funds from the government and other sources. The vast majority of Wall-Apelt’s collection has been in storage at the museum since 2008.

Wall-Apelt has now filed suit against the museum, the university, and the affiliated Florida State University Foundation, claiming they have breached the terms of the gift agreement. Her attorney summed up her feelings, asking: “Here we are, almost nine years [after the donation], and she is out $6 million and the use of the collection, and what does she have to show for it?”

The museum’s executive director Steven High maintains that the museum has “met every element of this gift agreement.” Regardless, the museum has nearly 4,000 Asian art objects in addition to those promised by Wall-Apelt so it plans to open in January, 2016 with or without her collection.

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Can Donors Trust 1023-EZ?

1023-EZDonors rely on 501(c)(3) to indicate that an organization is carrying out charitable activities. But since the IRS released the streamlined exemption application (Form 1023-EZ), should they still do so?

The National Taxpayer Advocate (TAS) is an independent organization within the IRS that helps taxpayers who are having trouble resolving problems with the IRS. On July 16, TAS released its mid-year report to Congress. Among other topics discussed, the report includes TAS’s concerns about IRS treatment of taxpayers applying for exempt status.

Although TAS previously recommended that the IRS develop a Form 1023-EZ for use by small organizations, TAS is not happy with the Form that has been released for public use. The report explains that TAS is “deeply concerned about the IRS’s abdication of its responsibility to determine whether an organization is organized and operated for an exempt purpose and not merely accept an organization’s statement to that effect.” The report also argues that “[b]y adopting this approach, the IRS will undo, in the space of less than six months, decades of practice in this area.”

Our firm’s managing attorney, Arthur Rieman, has also criticized the Form. During an interview with Tax Analysts, he explained that streamlining the application “in this manner has the potential to open the floodgates to people who will use the relaxed requirements for exemption to game and abuse the system to reap profit and private gain at the expense of the trusting public.”

The IRS has told TAS that it intends to conduct audits of a representative sample of exempt organizations that have used the streamlined application in about 6 months and a year from now. At that time, the IRS intends to adjust its procedures to address any noncompliance it identifies. TAS believes this will have only a limited effect on compliance.

Our colleagues have argued that private foundations should not rely on a determination letter for an organization that has filed 1023-EZ. Should you?

Is it time for Congress to intervene and roll back 1023-EZ?

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Another Win for NY AG Schneiderman

imagesNew York Attorney General Eric T. Schneiderman is following his big win earlier this month with a $522,000 pay out from a Brooklyn rabbi who collected hundreds of thousands of dollars for fake charities.

Rabbi Yaakov Weingarten pled guilty in NY State Supreme Court to felony tax fraud for soliciting donations from thousands of donors for phony charities. He solicited donations for 19 totally made up Israeli charities, which he claimed helped needy Israelis, including the sick, the poor, cancer victims, and victims of terrorism. He admitted, “none of the money I collected . . . went to these entities, because they did not exist.”

Weingarten instead used the donations to pay his mortgage, home improvement payments, and cable and electric bills.

Under the terms of the settlement, approximately $360,000 will be donated to the UJA-Federation of New York. The Federation will in turn make grants to two Israeli charities: Schneider Children’s Medical Center of Israel, a pediatric hospital, and United Hatzalah of Israel, a fully volunteer Emergency Medical Services organization. The remaining settlement money will be paid to the State of New York and will cover civil fines and penalties.

Weingarten is also permanently barred from charitable fundraising in the State of New York.

Continuing the string of charity scandals hitting New York, former CEO of Metropolitan Council on Jewish Poverty, William Rapfogel, was recently sentenced to 3 1/3 to 10 years in prison and ordered to pay $3 million in restitution for stealing from the organization. Investigators from Schneiderman’s office found that Rapfogel took more than $3 million “to fund a lavish lifestyle.”

A recent Chronicle of Philanthropy opinion piece urges “nonprofit leaders and boards of directors to step up and take the risk of confessing to abuses of funds and other serious misdeeds.” Already a difficult task, nonprofits must support independent oversight. How are the leaders of your nonprofit encouraged to speak up when they see bad deeds?

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