When the Internal Revenue Service last year issued rules 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 that previously was about as easy to extract as an impacted wisdom tooth.
But as The Chronicle of Philanthropy has discovered after years of rummaging through those IRS Forms 990, reporters should be cautious about relying on the information nonprofits provide. A case in point might be called "The Mystery of the Disappearing Fund-raising Expenses."
Acting on a tip from a source who teaches nonprofit accounting at a major university — who told us that one of her research papers discovered that many nonprofits with sizeable incomes were reporting spending nothing on fund-raising — we decided to do a computer analysis of the fund-raising expenses reported on the 990s filed by the largest nonprofits in 1996 (the most recent year for which computerized data were available). We reasoned that any charitable organization that raised $500,000 or more in gifts during the year must have spent something to raise those funds.
Keep in mind that the IRS definition of what must be reported as fund raising 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. We found nearly 5,000 organizations which reported at least $500,000 in gifts for that year — of which more than 25 percent had reported zero fund-raising expenses. In many cases — approximately half — there were good explanations; the most common being that the charity reporting no fund-raising costs was affiliated with another nonprofit organization that handled all the fund-raising. Another common reason covered the foundations formed by state universities: The schools themselves — which as government entities don't file 990s — do the fund-raising, while the foundations distribute the money from the gifts, so 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 fund-raising. 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, and get real huffy if they don't want to give them to you (ask them what they have to hide).
We also obtained databases from three states — California, New York and Ohio — that require registration from all professional fund-raisers and charities that use solicitors. We found dozens of examples of charities that had hired solicitors and still told the IRS they'd spent nothing on fund-raising.
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. Neither reported any to the IRS.
Some of the explanations were priceless: One group, in a classic case of Orwellian Newspeak, told us that "to put fund-raising in the column called fund-raising would be misleading." Its argument was that since all the organization does is raise money to distribute to other charities, its fund-raising amounted to its official program (program services, the money spent on a charity's stated function, is reported on a different line of Form 990). The IRS was not amused, pointing out that the organization's program is to distribute money, not raise it, and that everything it spent on fund-raising should be listed as fund-raising expenses.
The Arizona Community Foundation insisted it does no fund-raising, and then sent us a copy of its newsletter which included a half-page solicitation of bequests.
A large number of charities pointed the finger at its outside accounting firms, saying they filled out the tax forms. Most of the major firms refused to comment, and those that did insisted their policies require precise reporting of all fund-raising costs.
Why would nonprofits go to such lengths to hide their fund-raising costs? Two reasons: One, most of the watchdog groups in this area rate charities based on the percentage of their revenue they spend on their programs, and if you can make it seem like as little as possible is going toward fund-raising, you come out looking better to potential donors. Two, there are virtually no penalties for hiding fund-raising costs, because the IRS doesn't even look at them.
The results of our investigation should be an object lesson for journalists and the general public. Examine the tax forms of nonprofit organizations with care, and apply common sense.