501C's are used to run just about every kind of fraudulent accounting schemes, some observers say. Legal fees, a line item in most non-profit accounting reports, are well-used money laundering schemes that evade US taxes and use fraudulent accounting techniques to violate US banking and SEC laws.
As part of the Tax Exempt Compensation Enforcement Project, the Internal Revenue Service (IRS) announced August 2004 that it intends to examine non-profit organizations (NPO), to learn more about the practices nonprofits follow as they fill out Form 990, the main public disclosure documents for charities and foundations, and whether accounting fraud and tax evasion is taking place, and whether the compensation of specific individuals is excessive and, and whether instances of questionable compensation practices may evade IRS, banking and SEC laws.
The IRS will examine NPO insider transactions, such as (1) loans, the (2) sale, (3) exchange or (4) leasing of property to non-profit officers and others. In particular, the IRS will look to see how organizations report (5) "excess benefit transactions" on Form 990, and (6) executive pay.
News agencies reported the IRS statement Aug 10, 2004, and that some 2,000 charities will be reviewed under a new IRS enforcement effort to determine whether NPO are abusing their tax-exempt status. "We are concerned that some charities and private foundations are abusing their tax-exempt status by paying exorbitant compensation to their officers and others," said IRS Commissioner Mark Everson. The IRS began the new enforcement project at the end of July and will continue through 2005.
The IRS has received complaints that 501C's are being used to run just about every kind of off-the-books accounting fraud. In one case, the president of a non-profit organization was embezzling donations and was engaging in accounting fraud by having the NPO pay his entire apartment lease which was fraudulently booked on non-profit documents as a "business office."
When the incident was reported to the IRS, they agreed that documentation to prove the fraud existed, but that the IRS had the staff to investigate non-profit fraud solely in amounts totaling $100,000 or more. The only way the fraud could have been stopped was to hire private attorneys to take the individual to court for fraud against the non-profit. However, the non-profit board walked away from it because they didn't have the personal resources to stop the fraud.
Concerns have also been raised that the IRS has been stymied in its efforts to penalize falsified tax documents and official financial instruments to cover-up theft, and the failure of individuals to report stolen money as income.
Nonprofits, authorities, trust, foundations, unions, have the potential and may, in fact, be major money laundering conduits. They wrap themselves in all sorts of high-sounding causes while engaging in activities that are fraudulent and benefit insiders at the expense of law-abiding Americans.