Cause of Action has released an interesting report on the problem of fiscal sponsorship abuse.
The report is called “Conprofit: How the IRS’s Failed Oversight Allows Nonprofit Money Laundering.” (It is available here.)
While the IRS’s recent attention has been focused on scrutinizing tax-exempt applications, it has approved the tax-exempt status of charities that have engaged in money laundering and fraud. This system of abuse involves CEOs and corporate fraud, but its culprit cannot be found on Wall Street or in the boardrooms of large, publicly-traded corporations. This fraud occurs in small, tax-exempt nonprofits, often run by one or two individuals who have discovered an opening in the tax code that allows them to dupe unsuspecting start-up charities and fly under the radar of an over-complicated tax code.
What follows in this report, based on Cause of Action’s fifteen-month investigation, is an account of a dangerous pattern of abuse that has destroyed jobs and ruined charities whose aim was the public good. This abuse, combined with fabricated tax documents and bank statements and the mismanagement of federal grant money, paints a picture of corruption protected under the auspices of a process called fiscal sponsorship that is unmanaged, unchecked, and undefined by the Internal Revenue Service (IRS).
Whether through Congress or IRS rulemaking, the abuse of fiscal sponsorship warrants correction to protect taxpayers and charities. By clearly defining the parameters and standards of fiscal sponsorship, the IRS can alleviate its backlog of failed oversight of tax-exempt groups and prevent future nonprofit Ponzi schemes.
Cause of Action has also filed a petition for rulemaking with the IRS in the hope of changing current rules on fiscal sponsorship.