Reporting nonprofit fraud: an explainer

IRS Form 990, Schedule O.

IRS Form 990, Schedule O. Question 5 of Section VI is highlighted.

Some corporations are exempt from taxes because they do good: true. Employees at tax-exempt corporations always do good: false. Employees of Philadelphia area nonprofits embezzled and/or stole at least $8 million between 2008 and 2012 alone, according to a database of tax filings compiled by The Washington Post. And that figure accounts only for what those organizations voluntarily reported to the government.

The IRS requires nonprofit organizations to report “significant diversions,” or theft and/or embezzlement in amounts that surpass a given threshold. The amount in question becomes significant when it “exceeds the less of $250,000 or 5 percent of the lesser of organizations’ gross receipts for its tax year or total assets at the end of its tax year,” according to nonprofit law specialist Bruce Hopkins.

Let your brain squirrels chew that up for a minute.

Now, in the event of a significant diversion of funds, nonprofits must check “yes” to the fifth question in Section A, Part VI of the Form 990 they annually file with the IRS. Organizations such as the Foundation Center and Guidestar.org aggregate and release these forms to the public. If you can’t find the specific 990 you’re looking for online, you may directly request it from the IRS using a Form 4506-A.

As of 2009, the IRS now also requires that any nonprofit to report a significant diversion must furnish more information about the incident in an attachment called “Schedule O.” The filer must in this section describe the amount of property and/or money involved and how the organization has responded: audits, reports to law enforcement, termination or suspension of those responsible, etc. Regulations do not require that nonprofits disclose the incriminated parties’ actual names.

Only the hardest headachers make the news: a La Salle food service employee in 2011 stole $5 million from the university. A Children’s Hospital of Philadelphia executive pled guilty to a charge that he embezzled $1.7 million that same year. But the smaller cases that go unreported by major area news organs are much more common than you’d think.

Take for example The Caring Center: a nonprofit daycare located at 31st and Spring Garden. The Caring Center’s board found that their executive director administered organization funds without board consent between 2001 and 2011. They did so by way of a secret bank account.

We’ll hereafter refer to this person as “X.” The goal here is not to incriminate anyone, but rather to illustrate how the process by which nonprofits report fraud works, and that it may not always work the way it should.

The Caring Center sent evidence of these dubious transactions to an accounting firm for a forensic audit and attached the results with their 2010 filings to the IRS. Deposits to the secret bank account during those 10 years include $31,665 from the School District of Philadelphia and $10,000 from the Commonwealth of Pennsylvania, according to documents the daycare provided auditors.

X, compensated $89,100 in 2010 for their work at the daycare, also between 2001 and and 2011 used that account to:

  • write checks in total of $11,783.45 to their own, personal bank account;
  • write checks in total of $4,925 to their spouse’s account;
  • charge a total of $23,091.90 to retail vendors such as Dell, QVC Home Shopping Network and Target and
  • charge a total of $66,903.40 that may have gone toward “unauthorized bonus payments to TCC staff members [and] to reimburse TCC staff members for work-related expenditures.”

The daycare’s board of directors relieved X of their position in 2012, forwarded information about “the matter to Deputy Attorney General of the Commonwealth of Pennsylvania” and “requested a referral for investigation to the Philadelphia District Attorney’s Economic Crimes Division.” The “investigation by the Philadelphia Police Department [was] ongoing” at the time of the form’s filing.

This may constitute a federally indictable offense. The Department of Justice earlier this year arraigned an employee of Philadelphia nonprofit Self Inc. for embezzlement, fraud and theft of around $48,558. The defendant in that suit could face 10 years in prison and/or $250,000 in fines if convicted.

But a case never came together. X incorporated a new nonprofit the year after the daycare fired them. They also act as president of the Philadelphia chapter of a nonprofit women’s career empowerment group and teach as an adjunct professor at a local college.

One thought on “Reporting nonprofit fraud: an explainer

  1. For many nonprofit organizations, risk assessments often identify the three categories of fraud this article began with—skimming, purchasing, and financial reporting frauds—along with other schemes as risks that must be addressed.

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