Are certain Seattle charities in line for a visit from the IRS?

Those of you who regularly visit this space probably know I have a day job as a Senior Editor at Forbes. I started work at the business magazine a quarter-century ago, a long time before becoming New To Seattle.

Among the topics I write about in Forbes are nonprofits. Last month, I authored a long story about how certain charities play accounting games valuing the medicines they send overseas. In particular, they take deworming pills,which fight intestinal parasites in humans, that can be purchased on world markets for 2 cents a pill and put them on their accounting statements for as much as $16.25 a pill–an 81,000% mark-up. This ploy involving mebendazone and albenzadole makes the charities look bigger and more financially efficient to would-be donors than they really are.

If some of this sounds familiar, it’s because I peeled off the not-inconsequential Seattle angle into a post here, which you can read again. Two Puget Sound-area faith-based charities that are among the country’s largest of any kind, Crista Ministries in Shoreline and World Vision in Federal Way, handle a lot of deworming medicine. World Vision had lowered its valuation from $10.64 in earlier years to $2 a pill–still way too high, in my opinion.

But Crista, a charity conglomerate that has retirement homes, schools and radio stations, stuck to $10.64 for most of its pills. Because of that ridiculously high valuation, deworming medicine accounted for nearly three-quarters of Crista’s $85 million in contributions received. At Forbes, we marked down Crista’s incoming gifts to market price and took the nonprofit off our annual list of the 200 largest U.S. charities, which I edit. (A third nonprofit in Seattle too small for the Forbes list, Pilgrim Africa, also moves around a large volume of deworming pills.)

Why do I bring this up again now?

Earlier today, I posted a story on Forbes.com about Food for the Hungry, another large faith-based charity (in Phoenix) that is also big into deworming medicines. It turns out that the Internal Revenue Service had been auditing FH over the way it valued the pills in 2008. I got my hands on a copy of the audit report, dated January 6, 2012. The report said FH had overstated the value of good received–mainly deworming medicines–to “mislead the public in order to raise more funds.”  The feds are even seeking to impose a $50,000 accuracy-related penalty and want FH to file a new tax return with corrected numbers.

FH’s chief financial officer, Barry Gardner, said the 2008 accounting was done in accordance with federal tax law and generally accepted accounting principles, and that FH would contest the finding.

Aside from the local presence of Crista, World Vision and Pilgrim Africa, here’s the other big Seattle angle. Gardner said it was his understanding that the the IRS has a task force looking nationally at the issue of donated goods valuations. Furthermore, Gardner said, it was his understanding the task force was based in–Seattle!

Now, if that’s true, it wouldn’t take a lot of dot-connecting for the feds to decide it would be a good idea to take a few trips up and down Interstate 5. For all I know, they already have.

Aside from valuation shenanigans, the IRS audit of FH also concluded the charity actually had bought the pills from manufacturers or intermediaries for pennies each rather than receive them as donated goods. In the nonprofit world this is a huge deal. Something that is purchased cannot be counted as a gift received. Calling all those pills purchased rather than donated sinks the amount of donations received and fundraising efficiency–key metrics the public and charity watchdogs use to assess charitable performance.

If the IRS is right, FH is hardly alone. In my Forbes article, I got one charity, Islamic Relief USA of Alexandria, Va., to admit it had paid “handling fees” for the supposedly donated pills roughly equal to the the actual cost of the medicine. (Since Islamic Relief USA had valued those two-cent pills at $16.25 each, we whacked that charity from the Forbes 200 list, too.)

Many of these charities specializing in gift-in-kind, as donated goods are called, have the same auditors or belong to the same trade groups. My guess is that a lot of people are talking nervously, in Seattle and elsewhere.

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Are certain Seattle charities in line for a visit from the IRS? — 1 Comment

  1. Pingback: Valuation of deworming gets more complicated – the IRS gets involved « Nonprofit update

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