With such as significant portion of donations to Israel’s charities coming from the United States, changes in American legislation can have a profound impact on Israeli nonprofit organizations.

For this reason, I was excited to co-host (along with Charlie Kalech of J-Town Productions) Laura Solomon, an attorney based in Philadelphia who specializes in nonprofits.   Laura was a powerhouse, leaving me and the other attendees racing to take notes fast enough.

Most revealing was what Ms. Solomon had to say about individual States’ severe rules governing fundraising registration, specifically the broad definition of those required to register and the consequences of failing to do so.    

Below are my notes from the event. Please remember that many of the things mentioned only scratch the surface and proper council should be consulted before acting on anything.

BACKGROUND TO U.S.A. STATE SOLICITATION REQUIREMENTS

Nonprofits are subservient to two forms of regulations, Federal and State. While the focus since 9/11 has been more on the Federal level – Patriot Act, Sarbones-Oxley 990 changes, etc – recent rulings in the State level are forcing charities to pay close attention to the additional guidelines (and penalties) emanating from this sphere, as well.

Federal law regulates how organizations use and report funds. In contrast, State law  regulates how funds are raised, which States call Solicitation (and what us normal folk call Fundraising).

As far as States are concerned, Solicitation is anything that leads to a request for a donation or collects data. And yes, organizations are held accountable to this broad definition.  Any solicitation requires registration & annual reporting in the State where the nonprofit is soliciting donors. (Though Laura estimates that only 20% of charities register with the State where they solicit.)

The recent push is a result of the tremendous pressure that States are under – even more than the Federal government – to shrink their vast deficits. Within the States, it is most often than not the Attorney Generals who are spearheading the efforts to examine tax exemptions and compliance by nonprofit organizations.

FILING REQUIREMENTS

40 out of 51 states, including Washington D.C., regulate solicitation of charitable funds.

Laura stressed that the filing requirements can be quite tricky.  Unfortunately, there is no master registration form that applies to all 51 jurisdictions. However, there are instruments that try to ease filing requirements. The Unified Registration Statement (URS) claims to offer one form for 37 participating States. Though, the site notes that even participating States may require supplemental forms.

Ms. Solomon stressed that it is best to ensure that the in-house employee or external firm tasked with organizing the solicitation registration have a propensity for detail, with a law degree being very helpful if not critical.

WHO NEEDS TO REGISTER?

An important point to remember is that even if the charity is using a fiscal agent (a.k.a. intermediary) the benefiting charity still needs to register at the State level. The exception to this would be when a fiscal agent or fiscal sponsor lists the benefiting project in its own filings with the State. In such a case, it could be possible that the benefiting charity would then be exempt from submitting its own paperwork.

Along the same lines, independent solicitors (individuals or companies) that are hired by a nonprofit to fundraise must also register. Failure to do so will affect the recipient charity.

In contrast, grassroots volunteers or community-based (unpaid) “fundraisers”  do not have to register.  However, charities are ultimately responsible for the conduct of the volunteers and must register if volunteers are collecting donations on behalf of the organization. Laura suggested that charities should have a written agreement with their volunteers to create a paper-trail that can prove or deny any official connection / responsibility between the volunteer and the nonprofit.

Most relevant for Israeli charities is the need for foreign nonprofits to register, as well. Much like a fiscal agent, it is also possible that a “Friends of” organization in the States can list it’s Israeli nonprofit  as a benefiting charity, thus, enabling them to avoid registration. Again, please consult with legal counsel to determine if and how this can be done.

CONSEQUENCES OF FAILING TO REGISTER

The fines for noncompliance are pretty steep, with 5 to 10 thousand dollars being the norm. It could very well be that the decision whether or not to register in a particular State might just boil down to simple math: $125 to register vs. $5,000 if fined. But of course, the ultimate decision resides with the charity and its licensed advisers.

Non-registration can have operational side-effects, as well. Laura reported that foundations are starting to require proof of registration when potential recipients apply for grants.

POINTS OF INTEREST

• Most States prohibit fundraisers from receiving a percentage of the money they raise.
• Merely having a website might not be considered Solicitation.  However, a “donate” button can change this perception.
• While slightly out of date, the Charleston Principles listed on NASCONET.org, provides a great working definition of Solicitation.

Do you have experience with State solicitation that you think others can learn from?

Tizku Lemitzvot,

Shuey

Disclaimer:  This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Photo Credit: “Paperwork” by Curtis Gregory Perry (Flickr)

Laura Solomon is a nonprofit attorney extraordinaire based on the East Coast (read more about her after the post).  The topic addressed is especially relevant with today’s focus on the IRS’ increased scrutiny of Americans’ activity abroad and Israeli charaties’ reliance in general on foreign charity.

Every year the IRS Exempt Organizations Division (“EO”) releases a Work Plan that shows where it plans to deploy its resources. The Work Plan is essentially a roadmap for EO activity in the coming year and, this year, the Plan includes a renewed focus on international activities by American charities.

The EO’s goal is to assure that, in keeping with US tax laws and regulations, charitable assets used internationally are not being diverted for non-charitable purposes. The Work Plan announces that “we will continue to examine exempt organizations that operate overseas to ensure that those activities are consistent with their charitable purpose. “ In addition, the EO has signaled that it plans to examine large private foundations and organizations that report ownership of a foreign bank account.

Nonprofit professionals interested in learning more may want to look at the Work Plan itself or watch the IRS August 2011 Webinar on International Activities.

This renewed focus may make Israeli charities that get funding from the US a little jittery – particularly following the IRS’s release of two private letter rulings (2010 and 2012) that denied exemption to new organizations seeking exemption for American charities that planned to do fundraising for Israeli charities. In any case, it should serve as a wakeup call to all American charities that conduct activities internationally that they need to strictly comply with the law and must avoid serving as a mere “conduit” to their foreign grantees.

Further evidence of the EO’s focus on international activities is evident in the newly proposed regulations that illustrate permissible PRI’s or “program related investments” by private foundations (Issued April 19, 2012). The regulations include helpful examples that demonstrate that a private foundation can use a broad range of programs (including investments, grants, and loans to foreign individuals, business enterprises and charities) to support their purposes through PRI’s. Perhaps the most important clarification that the proposed regs provide is confirmation that an activity in a foreign country is charitable if it would be considered charitable when conducted in the US. Interestingly, they don’t address L3C entities. For more information about low-profit limited liability companies, you can access this information on the Community Wealth Ventures site.

Laura N. Solomon, Esq. is the founder of Laura Solomon Esq. & Associates, a law firm devoted to the representation of nonprofit, charitable, and other tax-exempt organizations. She and her associates provide a full range of corporate and tax legal services, including representation for mergers, joint ventures, and complex financings.

Ms. Solomon is on the Faculty of the Nonprofit Institute and Animal Law Institute of the Philadelphia Bar Institute, and currently serves on the Charitable Organizations Committee of the Pennsylvania Bar Association, the Tax-Exempt Organizations Subcommittee of the American Bar Association, the Standards for Excellence Committee of the Pennsylvania Association of Nonprofit Organizations, and the Advisory Committee for the Pennsylvania Volunteer Lawyers for the Arts. She is a columnist for the Pennsylvania Nonprofit Report who is quoted frequently in the media, and lectures often for lawyers, accountants, and other professional and community groups on nonprofit, corporate, and tax issues. Ms. Solomon also lectures at the La Salle University Nonprofit Center, the University of Pennsylvania, and Villanova, Drexel, and Temple Universities.

You can find more information about her practice along with links to helpful information on nonprofits at her website: www.LauraSolomonEsq.com.

A recent New York Times’ article attacked American charities that help build communities in  Israel’s West Bank and IRS policy that enables donations to these organizations to be tax-deductable.  As with any piece about the Palestinian-Israeli conflict, many people have been quick to attack or defend the veracity of the article.

To nonprofit organizations, the value of the article is not the accuracy of the authors’ claims, but rather the article’s insight into current concerns and trends influencing the nonprofit sector.  These can serve as warnings and guidelines to US charities that operate internationally.

Towards this end, I have highlighted themes in the article through blocks of text.

Charity Law as an Extension of US Policy

Using tax-exempt donations to help Jews establish permanence in the Israeli-occupied territories – effectively obstructing the creation of a Palestinian State.

Mr. Obama has particularly focused on them as obstacles of peace.

As the American government seeks to end the four-decade Jewish settlement enterprise…the American Treasury helps sustain the settlements through tax breaks on donations to support them.

Washington has consistently refused to allows Israel to spend American government aid in the settlements.

The article hints to a link between United States charity regulation and governmental policy.   While there necessarily shouldn’t be a connection between the two, the facts on the ground seem to hint otherwise.  More because of increased scrutiny by the governmental department tasked with overseeing nonprofits rather than because of changes in law.

It would behoove organizations operating overseas to consider this growing link (at least during President Obama’s tenure) and to consider US policy when formulating strategy and governance.

Board Members and Officers Should Not Be A Rubber Stamp

It [Shuva Israel, a US tax-exempt charity] has two volunteers who double as board members. “I’ve never been to the board,” said one of them, Jeff Luftig.

Independence and control: two running themes in nonprofit legislation, regulation, and audits.

Volunteers who agree to serve as a board member should understand that this voluntary service comes with mandatory responsibilities. The same holds true for a nonprofit searching for potential candidates.  The United States Government and the public look to a Board of Directors as the brains and power behind a charity; as such, the board is expected to actively participate in the running and planning of a nonprofit.

Local Charity, Local Board

Although IRS rules require that American charities exhibit “full control of the donated funds and discretion as to their use,” Shuva Israel [a US tax-exempt charity] appears to be dominated by Israeli settlers.

The IRS does not want an American charity to be a puppet, subservient to the wishes of another organization or individual — local or foreign.  While foreigners are allowed to sit on the boards of American charities, the nonprofit should never appear as if it has lost its American identity and independence.

Silence Speaks Volumes

Settlements violate international law…

In some ways, American tax law is more lenient than Israel’s.

Asked whether it had ever filed a tax return, he responded, “I’m not in a position to answer that.”

Records from the group [Manhigut Yehudit] say a portion of the $5.2 million collected has gone to Israeli “community facilities”…neither man would answer questions about the nature of the “community facilities.”

Silence can sometimes be the worst answer an organization can give as it hints that perhaps no employee knows the answer or, even worse, that the organization has never bothered to ask the question.  Conferencing with lawyers, accountants, and other professionals can often turn up most of the potential challenges facing the charity. It is to the benefit of the organization to prepare responses to expected Frequently Asked Questions and designate  employees and volunteers best equipped to answer them.

The organization’s reputation demands an answer better than silence.

Filing with the IRS: The Best Defense is a Good Offense

Religious charities are still more opaque; the tax code does not require them to disclose their finances publicly.

Religious groups have no obligation to divulge their finances, meaning that settlements may be receiving sums that cannot be traced.

Religious organizations – like many of the charities that support Israel – that expect to come under government or general scrutiny should consider filing relevant IRS paperwork even though they are not required. Entering background, managerial, and financial information information ahead of any “investigative piece,” is convincing evidence that the nonprofit’s intentions are noble, as well as legal.

Conclusion

As the United States Government loses millions of dollars from noncollectable donations to tax-exempt organizations, charities will always be subject to public and governmental scrutiny.

After reading the excerpts from the Times article, one can certainly understand more of the public and regulatory sentiment towards US registered charities operating abroad, especially those supporting Israel. This said, American nonprofits can still fulfill their mission, operating at their peek capacity.

Among the many DON’Ts mentioned by the authors were also some excellent DOs, which, if followed, can prevent the very accusations highlighted in the article:

The [US] tax code encourages citizens to support nonprofit groups that may diverge from official policy, as long as their missions are educational, religious or charitable.

The Time’s review of pro-settler groups suggests that most generally lie within the rules o the American tax code. Some, though, risk violating them by: (1) by using the money for political campaigning and residential property purchases, (2) by failing to file tax returns, (3) by setting up boards of trustees in name only and (4) by improperly funneling donations directly to foreign organizations.

But the IRS does allow deductions for donations to American nonprofits that support charitable projects abroad, provided the nonprofit is not simply a funnel to another group overseas.

Truly, good advice to follow.

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

And the hits just keep on coming…

Nonprofit organizations have yet another hurdle to cross when applying for tax-exempt status.

A while back, a colleague of mine, a director of a nonprofit organization, applied for tax-exempt status in the United States. The IRS had questions for him, which was to be expected. What was not expected, however, was that after answering the IRS’ questions, his file was then forwarded to the Department of Homeland Security [DHS].

That’s right, the U.S. Government Department that oversees (no pun intended) counter-terrorism, border security, disaster response, and immigration is also an integral part of the tax-exempt approval process.

Why is the Department of Homeland Security Scrutinizing Charities?

The DHS investigating is no random act. As explained in a previous post:

The U.S. Internal Revenue Service (IRS) stresses that the risk that a grant will be used for non-charitable purposes increases drastically when dealing with foreign grant making and expenditures…intelligence information hinting “to the effect that international charities are the second principal source of money that underwrites terrorist activity”

Questions asked by Homeland Security

1. IRS Type Questions

Similar, if not exact repeats, of questions asked by the IRS.

2. Nature of Activities – Lobbying/Advocacy

The nature of the activities of the charities abroad that would be receiving the money. Specifically, if the receiving charity participates in lobbying and/or advocacy. In the United States, certain types of lobbying/advocacy label the organization 501(c)4 tax-exempt charity. Donations to (c)4 charities are not tax-deductible. If an organization is worried if they fit this category, they might want to look into the 501(h) test.

3. Control Measures

Control measures in place to ensure that the money will be used strictly for charitable purposes.

4. Legal Status of the Recipient Organizations

The DHS asked if the recipient charity is considered a 501(c)3 charity in its respective country. This question is a little tricky because countries have different definitions of what it means to be a nonprofit organization.

In Israel, for example, is the DHS referring to the Nihul Takin [Certificate of Proper Management] given out by the Registrar of Charities [Rasham Ha'amutot] or Seif 46a [Paragraph 46a] certification given out by the Tax Authorities [Mas Hachnasah]?

5. Independence

My colleague stressed that the DHS was very interested to know that the funds sent abroad were not limited to only one recipient. It is crucial for the IRS that the American entity be an independent, self-governing body that is not subservient to any other foreign or local individuals/organizations. And yes, this is a running theme in my blog posts. (A previous post, “Reasons Why Not to Establish an ‘American Friends Of’ elaborates on this Independence.)

Conclusion

What lessons can we learn from this organization’s experience?

1. Longer Process

US registered nonprofits who are applying for tax-exempt status can expect the process to take longer. This is not necessarily a must – maybe no red flags will be raised and it will be smooth sailing. However, I wouldn’t count on it.

2. Treat the DHS Seriously

Even though it might seem that the DHS shouldn’t be in the picture or that their questions are repetitive (maybe even ludicrous and pointless), don’t belittle their role. Whereas the IRS has control only over your tax-exempt status, the DHS can freeze your assets. The Patriot Act allows the U.S. Government to freeze assets first and ask questions second, if they should think that the accounts are connected to terrorism. As of today, the DHS has a big mandate. Don’t mess with them.

3. Adjust Accordingly

The right experts can help you write your By-Laws (including mission and mandate) in a way that raises less flags. I am not advocating lying, fibbing or stretching the truth. Just the opposite: Good charities shouldn’t suffer simply because they wrote their By-Laws in a way that doesn’t accurately describe the activities of the organization.

4. Plan in Advance

If you can theorize the types of questions that your organization’s application will elicit, then you should also being able to prepare answers in advance.

When fundraising, acquiring 501(c)3 tax-exempt status quickly can make-or-break attracting that big, elusive donor. Why unnecessarily lengthen the process?

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Too many times the IRS has hinted at the direction to which it is heading, with people taking little notice.  Well, in quiet screams, the IRS is doing it again, with the release of their interim report last week: “IRS Exempt Organizations – Colleges and Universities Compliance Project.”

I preface that I have not yet read the report, but I will. And here’s why I think you should too:

1. The I.R.S. is Cracking Down

The interim report summarized responses to “compliance questionnaires sent to 400 public and private colleges and universities in October 2008″ (IRS press release).  This is not the first report (the IRS did a similar report on nonprofit hospitals) that the IRS has sponsored nor will it be the last.

2. Knowing is Half the Battle

Reading the report can give a nonprofit – especially schools — a sense of what to expect:

The interim report contains preliminary information on the respondents’ organizational structures, demographics, exempt and unrelated business activities, endowments, executive compensation as well as governance practices. (IRS Newswire IR-2010-058)

3. The IRS has Teeth

The report was not just some intellectual study.

The IRS has opened examinations of more than 30 organizations that were selected based on responses to the questionnaire. These examinations focus primarily on unrelated business income and executive compensation issues.  A summary of findings and information learned from the examinations will also be included in the final report. (IRS Newswire IR-2010-058)

Last time I checked, examinations were not a good thing.

4. The IRS is Learning

“This compliance project, like our previous one on nonprofit hospitals, gives us a lot of valuable information on activities conducted by those organizations that will help us in our enforcement and services efforts,” said Lois Lerner, Director of the IRS Exempt Organizations.  “Our findings will be reported in a final report after we have completed our analysis of all of the data.” (IRS Newswire IR-2010-058)

In other words, the IRS is learning more and understanding better how organizations work; the IRS sees itself as better equipped to oversee tax-exempt charities and judge their activities.  In my opinion, this feeling will lead to an increased desire by the IRS to put their newfound understanding to use and create more pinpointed inspections — performed both before and after a 501(c)3 tax-exemption has been issued.

Conclusion

I only happened to come across this announcement by accident (I can’t seem to unsubscribe from the IRS Newswire email list), but I am glad that I did.  We are seeing the IRS on an almost consistent basis increase its oversight of charities.  The old ways of running a nonprofit — little transparency, fiscal responsibility, and strategy — are quickly and quietly becoming extinct.  Or they should, if you want your organization to survive the IRS’ version of natural selection.

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

International organizations have been highly successful in raising funds from the United States through U.S. based charities commonly referred to as “Friends of” organizations. These charities are registered in the States and have 501(c)3 tax-exempt status, allowing donations to these essentially foreign organizations to be tax-deductible.

As you can imagine, many charities registered outside of the United States consider an “American Friends of” organization as a vital part of their fundraising strategy.

Jewish causes, especially those based in Israel, are no exception to this rule. A recent report compiled by Dr. Nissan Limor estimated that foreign donations to Israeli charities from sources outside of Israel stood at 2.165 billion dollars in 2007, with much of that coming from the United States (although, he didn’t stipulate how much). There are about 1,000 new Israeli charities [amutot] created every year and it would hold that many of these organizations will seek to create an “American Friends of” supporting charity.

Hence, recent conversations I have had are causing me to worry.

The Reduction of 501(c)3 Exemptions Granted

In late July, I wrote about the scandal that rocked the Jewish community of Brooklyn and Deal, culminating in the arrest of three mayors, five respected community rabbis, and a score of government officials. Specifically, my third post on the scandal described the The IRS Expected Response.

In that post, one prediction I made was the “Reduction of 501(c)3 Exemptions Granted”

The easiest way to prevent future international fraud is to restrict the organizations that can gain tax-exempt status…The U.S. Department of Treasury has only enough manpower to audit between 2 – 3% of registered charities in America. Scrutiny of organizations that already have 501(c)3, then, seems almost like an impossibility. However, as every new organization that wants tax exempt status needs approval from the IRS, it would be a relatively simple procedure to restrict approval to new charities; more specifically, to new charities that donate to international causes.

Well, unfortunately, this seems to becoming a reality. Three recent conversations are shedding light on what seems to be new practices by the IRS. (Specific names are being withheld as applications and relationships are still ongoing.)

The Name “American Friends of” Bothers the IRS

On a recent trip to the States, I had the fortune to sit with a prominent lawyer that represents many Jewish nonprofits. He informed me that he submitted a file for 501(c)3 approval for the “The American Friends of _______,” an organization that would like to raise funds for a charity operating outside of America (but not in Israel). The application is taking an inordinate amount of time, mostly due to the staggering number of questions the lawyer has received from the IRS representative assigned to his file. His application folder measures an astounding 2.5 inches! Having been submitting similar applications for decades, the lawyer is quite surprised at the level of scrutiny and feels that it is the organization’s name that is evoking this reaction. The lawyer is losing patience and if nothing changes, will close the application and resubmit under a different name, hoping this will solve the problem.

Charities Should be Supporting a Mission, Not Supporting an Organization

The following day I met with a well known nonprofit consultant that works with both Jewish and non-Jewish charities. He informed me that it has come to his attention that the IRS will no longer approve 501(c)3 status for organizations that are founded simply to support one specific institution. In other words, when applying for exemption, the papers should list the mission or objective that the charity supports, not what organization it supports. It was implied, however, that in practice, a 501(c)3 charity can transfer money to (i.e. support) a single foreign organization without fear of losing its tax-exempt status — the American nonprofit, though, must be able to prove its independence. (More analysis, tips and background on international charity emanating from America can be found on an article I wrote: “International Charity in the Face of Global Terrorism.”)

Don’t Go Against American Policy

And finally, upon returning to Israel, I was speaking to a director of a Israeli nonprofit who told me of a colleague of his whose American charity had applied for 501(c)3 tax-exempt status.  At the time, the applicant informed this director that in his application he stated that the mission was to support Judea/Sumaria/Gaza. The applicant assured the director that the approval was imminent. A half a year later, his approval had yet to come and this applicant soon gave up.

The Obama administration is not in favor of what it calls the “Territories.” Leaving politics aside, we are seeing organizations whose mission clashes with American policy and/or opinion having trouble obtaining 501(c)3 tax-exempt status.

Conclusion

In closing, I would like to stress that whether these trends are good or bad is not the issue. The important point is that Israeli nonprofits and their American supporting counterparts should take notice and act accordingly.

These conversations stress:

1. New organizations that have the words “American Friends of” in their name will have trouble getting their 501(c)3 tax-exempt status approved.
2. By-laws of organization should list the cause that the organization is supporting, and should not specify particular organizations.
3. When applying for tax-exempt status from the American government, it might be best to “tow the party line.”

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

The arrests of 44 individuals–including, 3 mayors, 5 respected community rabbis, a score of government officials, and others–on Thursday of last week (July 23) should highlight the dangers of organizations donating to international causes; and I guarantee you, the I.R.S. is having similar thoughts.

I believe that two reactions can be expected.

1. Greater Scrutiny of Charities

The fear that a charitable donation might not be used for a charitable purpose is not new. The U.S. Department of Treasury has long known the important role that charities play in financing terror and released in 2006 its third version of “Financing Guidelines: Voluntary Best Practices for U.S. Based Charities.”

(For a more detailed analysis, I published an article entitled, “International Charity in the Face of Global Terrorism: The U.S. Department of Treasurys Response.”)

Until now the guidelines produced by the IRS and other groups have been voluntary in nature and not enforced by the U.S. Government. Incidents like the one from last week and the Spinka Hasidim in 2007 are convincing the IRS that terrorists aren’t the only ones abusing the system.

With President Obama’s civic-minded government, we can expect these recommendations to become laws (click here to read more about Obama’s nonprofit agenda). When the Treasury reviews the practices of international organizations they will find that many of them are not following the guidelines that have been suggested. Organizations that are found to be negligent can find themselves facing criminal charges, fines, and revocation of tax-exempt status.

The U.S. government has already invested the time. The literature exists. In just a few short weeks, we can theoretically find these voluntary principles mandatory, so read the letter of the law and obey even the spirit of the law. Remember, the Patriot Act of 2002 allows the IRS to freeze accounts first, and ask questions later.

2. Restriction of 501(c)3 Tax-Exempt Status

The general locker-room talk, as one accountant put it, is that the easiest way to prevent future international fraud is to restrict the organizations that can gain tax-exempt status. Many Israeli organizations currently have or are thinking of opening “Friends of” organizations in the States to help fundraise from American citizens. Donations to these American-based organizations are exempt from United States federal taxes and are channeled to the final destination in Israel.

The U.S. Department of Treasury has only enough manpower to audit between 2 – 3% of registered charities in America. Scrutiny of organizations that already have 501(c)3, then, seems almost like an impossibility. However, as every new organization that wants tax exempt status needs approval from the IRS, it would be a relatively simple procedure to restrict approval to new charities; more specifically, to new charities that donate to international causes.

This could be done simply by requiring additional paperwork or by imposing a minimum existence period, as is the case in Israel.

(More about the difference between USA and Israeli charities can be found in my article entitled “Defining an Israeli Nonprofit Organization.”)

Those that are worried about obtaining this status should forget about waiting for the “right” time and apply now. For those organizations that do not set up a “Friends of” charities, organizations such as the PEF, Central Fund, FJC, One Israel Fund and others can provide receipts to donors and forward the money to the intended Israeli causes.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

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Related Posts:

The New Jersey Scandal, Pt. 1: The Facts

The New Jersey Scandal, Pt. 2: The Israel Fallout

Last week (July 23) in New Jersey, an undercover police operation revealed a rainbow of criminal dealings. The implications of the scandal vis-à-vis charities are too vast and far-reaching to be dealt with in one post.  Over the next day or two I will address the pertinent issues.  Questions and comments are welcome.

The Facts

Among the myriad accusations is the charge of the laundering of charitable donations totaling approximately 3 million dollars. The Jerusalem Post quotes sources saying that “at least some of the millions came from Israel” while the New York Times notes “much of the cash they provided him [the informant] came from Israel.” The Post explains that one of the rabbis detained “used a source in Israel to supply money through ‘cash houses’ [money changer].” The Post also quotes former Jerusalem Police Chief Mickey Levy who said Israeli authorities weren’t involved yet but didn’t rule out their involvement a later stage of the investigation.

To review:

• Money donated to a US based charity that operates internationally was not used for charitable purposes
• Some of this money was funneled through Israel
• In Israel, some or all of the money was handled by a money changer
• The Israeli police might become involved

What is Money Laundering?

A U.K. Parliament website defines money laundering as:

“The process by which the source of ownership of criminally derived wealth and property is changed to confer on it a perception of legitimacy. From the point of the criminal there seem to be three requirements:

• The need to conceal the true ownership and origin of the proceeds;
• The need to maintain control of the proceeds; and
• The need to change the form of the proceeds.”

Articles about the Recent New Jersey Scandal

44 Charged by U.S. in New Jersey Corruption Sweep (New York Times)

Syrian Sephardic Communities Shaken by Charges Against a Leading Rabbi (New York Times)

Millionaire, Patron and Now Informant (New York Times)

How the corruption case unfolded (New York Times)

Laundered cash may be from Israel (Jerusalem Post)

Life Can Imitate Art: Indictments Describe Deals More Fit for a Crime Movie (New York Times)

Hoboken Mayor’s Fall From Reformer to Defendant (New York Times)

Israel Likely to Probe Alleged Money-Laundering Network (Jerusalem Post)

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Related Posts:

The New Jersey Scandal, Pt. 2: The Israel Fallout

The New Jersey Scandal, Pt. 3: The IRS Expected Response

Professor Joel Fleishman, author of “The Foundation: A Great American Secret; How Private Wealth is Changing the World,” is very clear on one thing: America has a long history of positive social change affected through the initiatives of private individuals and foundations.   These nongovernmental institutions have been succesful because of their greatest weapon, independence.   An article that was recently forwarded to me in The Commentary Magazine entitled, “The War on Philanthropy”, by David Billet, argues that this autonomy is under fire.

First, by the United States Government.

The Obama administration has been trying to pass a law that will “reduce the charitable deduction for the highest two income-tax brackets by almost 30 percent.”  As it stands right now, these two brackets get to write off 39 percent while the other brackets only get to write off 28 percent; this initiative would cap all citizens at 28 percent.  But not to worry, it is all in the name of fairness.  And no, the President doesn’t address the fact that most charity is received from these top two brackets.  The President only offers a consoling “There is very little evidence that this program has a significant impact on charitable giving.”  Not so consoling when you read that the article cites a noted economist who concludes that “the President’s proposal would reduce the amount of money given to charity by at least 10 percent.”

Billet explains that “the specific indictment against private philanthropy goes something like this: Because the Treasury forfeits some $30 billion every year in various tax exemptions for charity, government has a responsibility to see that this subsidy is  justified by the use to while the money is put.”   Making things worse, the author is worried by the President’s “casual dismissal of the role of incentives in altruism” and that Obama “makes little of the fact that a donor does not consume a single penny of the charitable donation that is currently exempted from taxes.”  While currently, the Senate is refusing to pass the President’s bill, the economic downturn might force the Senate to rethink its position.

Second, by the nonprofit sector itself.

In recent years a number of think-tanks and organizations have sprung up that seek to police the “philanthropic status quo.”  Spurred by ideas of social and racial equality, these organizations are releasing widely-read authoritative reports and taking legal action in an attempt to impose “ideological mandates,” and to establish guidelines and percentages that will govern how foundations can allocate their funds.  In essense, the article concludes, these groups “rather than encourage the proliferation of views and ideas in the nonprofit world, they seek instead to stultify sameness.”

Third, by the socialists.

The article points out that the success of private institutions in providing public works is something that discomforts the public sector: “Virtually, wherever public and private groups take up the same task, the private group outperforms [the public sector].”  This is understanding considering that private individuals and foundations are energetic and passionate about their work, are more flexible than governmental agencies hampered by bureaucracy, are able to take more risks,  are more able to weed out corruption and are more fluid in moving on to the next pressing task.  The role of private philanthropy in the United States, thus, has been a matter of concern to those that believe that these tasks are justly the responsiblity of the government whose true function is “the administrator of social justice.”

This fight for independence is all the more prevalent in Israel, claims Hillel Shmid, Director of the Study of Philanthropy in Israel at the Hebrew Universityand Director of the Haruv Institute.  In a recent conversation I had with him, Prof. Shmid explained that the last decade has seen the government shifting away from being a socialist state.  Israel has been filling its void by contracting much of its former responsibilities out to nonprofit organizations.  To make sure that these institutions are up for the task, the government regularly issues guidelines and regulations.  In essense, Shmid argues, these institutions are slowly turning into mere extensions of the government.  The uniqueness and diversity once prevelant in Israeli nonprofits is starting to disappear.

The cure?  In Israel, the answer, while not easy, is straight forward according to Professor Shmid: He prescribes a complete withdrawal and refusal of governmental financial support.  A tall order, indeed, as these nonprofits would then need to rely soley on donations.  In the United States, the answers vary.  Some argue that as with natural disasters, one can only bunker down and wait for these policing trends to pass.  Others disagree and make a case for taking a stand and fighting in the necessary arenas.  Surely a costly venture.

Note: While I have summarized some of the points of the “The War on Philanthropy,” the full article is worth the read.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey