Wednesday, July 30, 2008

The Church and the IRS - Part 2

I am very pleased to see that my blog entry last week has sparked replies both on the blog site and via email. I very much appreciate the feedback and encourage other users of our site to feel free to join in the discussion as well. I list below some of the points I have made in the email and blog exchange regarding this issue:

[In my last blog entry] I was indicating what I consider to be basic common sense. We believe that donors to all public charities should be well informed before they give, so it seems wrong (to my common sense at least) when the lion’s share of private contributions goes to entities that have no obligation to inform their donors. I see no down side to this or infringement on the freedom to worship as one chooses. I believe that there is a veil of secrecy here, under the guise of separation of church and state, that needs to be removed for the good of all.

Anyway, in answer to the question of why “churches” (i.e. houses of worship) are not required to file (BTW, religiously affiliated organizations in most cases ARE required to file which is why we have a section on our web site for religious organizations), I am currently reading up on the history of this myself. However, I suspect it gets back to the separation of church and state. There are various interpretations as to the meaning of this and my opinion is, the “church” should be free from any state encumbrance in regards to how it chooses to worship (as long as it does not violate laws of public safety), but as a tax exempt public charity, they should have an obligation as all other such charities do, to provide an informational report as to their finances [if their annual revenues exceed $25,000].

Regardless of historical rationales for the right of privacy to extend to church finances and the legal interpretation (Lord knows we have changed our legal interpretations over time) by some of the possible violation of the First Amendment, it doesn’t make sense. I believe it just makes plain sense that an entity with tax exempt status should disclose its financial information to the IRS. I think one of the hallmarks of our country has been that, at the end of the day, common sense often wins out over a certain philosophy or specific political viewpoint.

Furthermore, back when this was all first set up, the money involved was miniscule by comparison to today’s record breaking amounts over $100 billion. Circumstances change and our policies should change accordingly. Continuous improvement of our policies as a nation!

The fact that SOME churches do provide SOME financial information to their congregants (or some leadership body) does not eliminate the need for the standardized reporting I suggest. This is an added layer of information and transparency that can be more broadly scrutinized and reviewed.

Thursday, July 24, 2008

God and Money - The Church and the IRS

A recent report heralded the fact that US donors gave more in private contributions this past year than ever before - over $300 billion. The people of the US are considered the most generous on the planet in their voluntary charitable giving (as opposed to what could be called involuntary giving, i.e. taxation!). We give more than double the amount of money (as measured by Gross Domestic Product)the people of the next most generous country give. Furthermore, the largest portion of that $300 billion goes to our houses of worship (referred to as churches by the IRS).

There are an estimated 350,000 churches in the US today and about half (the largest and most well established I suspect) opt to register themselves with the IRS. However, here is the first distinction from most other public charities - registering with the IRS is optional, not required - regardless of the church's size. For other public charities you must have less than $5,000 in gross receipts to be tax exempt without registering.

Then we get to the second and more troubling distinction. Every other type of public charity over $25,000 or more in annual gross receipts must file a report to the IRS (called a 990) every year. The churches are under no obligation to do so and the vast majority do not. In other words, over $100 billion dollars (that is an estimated amount, since we can not know for sure) was donated to churches last year and most do not report any information to the IRS on how much was taken in and what they did with the money. Doesn't that seem wrong?

We at Charity Navigator are able to rate charities based on the information provided on the IRS 990 forms. Since almost all churches do not file the form, it is impossible for us to evaluate over a third of the private contributions that go to charities. How can you as a donor be confident that your money is being spent for the purposes for which you gave it? We believe that, as with the public charities we rate, the vast majority of churches do the right thing. However, how are we as a society going to be able to hold to account those who are not doing right with the money we give? Given human nature, when this amount of money is involved, you better believe we have got some bad apples in the bunch.

Anyway, until such time as the laws change on this (some are predicting it will coincide with when pigs fly) we strongly encourage you who attend church to urge your religious leaders to opt in and file those 990s every year. We implore the church community as a whole to provide the transparency and accountability that is the hallmark of management best practices.

Tuesday, July 15, 2008

The Media Calls - A Week in the Life

This past week, because a couple of people were out of the office, I was called upon to respond to all of the media inquiries that came in. The calls came from all over the country - from Charlotte to Los Angeles to Colorado Springs, and then some. The nature of the calls is instructive as a sampling of the issues that are on the minds of the public:

1. 30% of the calls involved some type of questionable behavior or worse (Board self-dealing, extravagant events that lost many tens of thousands, relatives on the payroll, etc.).
2. 40% involved excessive compensation either for a CEO or private fundraiser.

I know that controversy attracts an audience, however it also gives a false sense to the general public of the nature and integrity of most non-profits. Of the roughly 5,300 charities that are rated by Charity Navigator, 65% are rated Good to Excellent. If we include those that meet or nearly meet industry standards, the percentage reaches about 88%.

The good news is that, in addition to the calls we got, an equal or greater number of media reports were published quoting letters we sent to charities that were recently given a four star rating by us. However, I suspect that the more prominently displayed, "headline grabber" articles, describe the controversies mentioned above. That is what most people remember. As usual, the few bad apples are giving the entire non-profit sector a black eye.

Wednesday, July 9, 2008

Transparency - A Tale of Two Nonprofits

I read in today's New York Times that two nationally known nonprofits are in the news spotlight because of reports of misappropriation of agency funds. The responses of the two organizations are instructive.

ACORN (not rated by us), a community organizing group, is reported to have had approximately $1 million "embezzled" about 8 years ago. The leadership of the organization chose to tell no one, not even their Board of Directors. In fact, it is reported that they even had the person involved in the embezzlement on payroll up until June of this year! After 8 years of cover-up, in May of this year, a whistle blower "forced ACORN to disclose the embezzlement".

The Points of Light Institute (which we give a four star rating), that promotes volunteerism and citizen activism, is reported to have had bogus travel packages auctioned off on eBay by an independent contractor. The organization found out about the problem in May of this year when they got complaints from people who had not received vouchers for their travel packages. The Points of Light Institute immediately jumped into action:
  1. They stopped the travel auctions immediately.
  2. They contacted everyone who had bought the travel packages.
  3. They have begun to repay people who bought the packages and hope to pay off all of them.
  4. They posted information on their Web site about the problem.
  5. They contacted the US Attorney's Office.

Here at Charity Navigator, one of our core beliefs is the importance of charity's transparency - that they maintain open communication about their operations, both good and bad, with the public. This transparency is critical for donors to maintain their trust in an organization. Without that trust, an organization can not survive for the long haul.

ACORN has explained its withholding of information as a concern that their critics would use the information against them if it was found out. How much worse will it be for them now, than if they had owned up to it at the time??