Public disclosure rules tightened

A 501(c)(3) status says, “Trust me,” to a public looking for a way to help.

While the vast majority of nonprofit organizations take that public trust to heart, there are exceptions. And as nonprofit leaders make greater appeals to the public for donations in an ailing economy, they want to avoid any smudges on the reputation of their sector. Observers are watching with great interest this year to see whether new disclosure requirements in the federal tax form that nonprofits file leads to more transparency — or more scandals.

“Donors are asking more questions now. They’re taking it more seriously because they have less money to give,” says Daniel Borochoff, president of the American Institute of Philanthropy, a national charity watchdog organization based in Chicago.

Under the changes, nonprofits must report more about their governance structure and executive compensation. With a public already enraged by executive salaries in the private sector, excessive salaries for charity executives who may be pleading for more dollars won’t exactly sit well.

“Some of the perks that the executives receive, like having first-class travel, companion travel, a housing allowance, executive chef — this will now have to be disclosed. In the past, charities could do these things and not have to tell anybody,” Borochoff says.

Nonprofit status under section 501(c)(3) of the Internal Revenue Code is easy to obtain but difficult to revoke. Questions have been raised about whether some nonprofits, such as hospitals that provide low levels of charity care, deserve the special tax status.

The sheer number of nonprofits makes it tough to provide oversight, and the system relies heavily on self-reporting in tax documents. “Being able to fake out the public is pretty easy to do. The current state of U.S. nonprofit financial reporting allows for charities to fudge the numbers to look good when they may not be doing much of anything of value,” Borochoff says.

Illinois is not without its own tales of people who use the trust bestowed on nonprofits to take advantage of others. Illinois Attorney General Lisa Madigan filed suit this spring against a Minooka man who pretended to raise money for veterans but was allegedly using the cash to pay his personal debts. Political insider Stuart Levine was brought down during a corruption scandal in part by charges that he used a charity set up to benefit a medical school to enrich himself instead.

While the increased public disclosure this year may help, the most important oversight could be provided by those whose job it is to do so: the organization’s own board of directors. “They need to do their job and not be asleep at these meetings,” Borochoff says.

Crystal Yednak

Illinois Issues, October 2009