FROM: Elias Baez, Allison Baal, Tenzing Lama

TO: Emily Andrews-Rice

FROM: Elias Baez, Allison Baal, Tenzing Lama

RE: Lack of Regulation and Support for Charitable Organizations

DATE: November 29, 2015

The memo and presentation brought attention to the issues of how we distinguish between a legitimate charity and a potential scam. It showed that legitimate charities will spend 25% of their revenue its on administrative and fundraising costs based on the percentage established by Charity Watch. It challenged certain practices in the industry – such as contracting for-profit fund raising companies with little oversight and the spending of charity funds in both legal and fraudulent ways to line the pockets of its staff.

We believe that you did an excellent job outlining the seriousness of the issue at hand. You stated that, in some charities, less than 4% of funds donated go towards that organization’s mission. This is a starting statistic that clearly shows the deceptive practices of some charities. This is making the donors more and more skeptical of donating, and taking money out of the hands of legitimate charities who will use the money to advance their missions. Cleary, we need a solution so that donors can be confident the money they give to charities will end up where intend it to.

Regarding the suggested proposal, we believe the following are within the scope of action that can and should be taken by the IRS and FTC in addressing the problem defined:

Eliminate 1023-EZ Form, simplify 1023 and 990 filings

The 1023-EZ was established to make the application for non-profit status easier for smaller organizations. The National Association of State Charity Officials (NASCO) denounced the use of the 1023-EZ on the basis that “collecting less information in the initial application for tax exemption … invites abuse and results in overall regulatory inefficiency.”[i] The jump in approvals of 2013 to 2014 are definitely indicative of a simpler process for application and approval of status, however, there is no strong indication that this simpler process has led to an increased in the application of scam organizations nor is there evidence that those that apply using it are likely to circumvent regulation.

However, as NASCO is an association of the state offices charged with oversight of charitable organizations, we defer to their authority and assessment that a simplified 1023 is a much better tool to orient applicants on the regulations and that the 1023-EZ circumvents that initial orientation. As you stated, the form should be “simple, not easy.”

Regulation and disclosure of for profit fundraiser centers

Disclosure and transparency are necessary when it comes to the exchange of money. The public should be protected when money is being solicited under the guise of a charitable donation. The law signed into California is a great but simple solution to addressing the issue of misrepresentation by these for-profit fundraising centers and we would urge the adoption of similar laws across all states (as corporate regulations are established at the state level).

FTC Supported Charity Review

As the FTC was established to protect American consumers, its falls within its purview to promote – and possibly to directly conduct – fair evaluation of charities. The promotion could be as simple as a campaign to inform the public of the existence of independent organizations that do such work (e.g. Charity Navigator and Charity Watch) or conducting similar independent rankings of its own. We believe that this is a very important aspect of eliminating illegitimate charities, as the public will be informed about how a charity’s funds are being spent. Having a place for donors to look up a charity they just became aware of before donating will help ensure that their money will be used to make a difference.

Regarding the suggestion of a national database for for-profit fundraisers, we see this as having little impact on how those centers operate nor in preventing such centers from moving to different states under different names, especially if a merger or acquisition is used to disassociate from the original operating company name. The notion that non-profits may avoid reporting funds raised by a third-party outside of the operating state would be better addressed by regulation establishing that such funds need to be reported under the state in which the funds were collected if the company is operating there or in the state of incorporation for those that don’t have other regional offices.

[i]National Association of State Charity Officials