The governance section (Part VI) of Form 990 asks whether there has been a significant diversion of assets. A diversion of assets includes any unauthorized conversion or use of the organization's assets, other than for the organization's authorized purposes, including embezzlement or theft. In some cases, a significant diversion of assets may be inurement of the organization's net earnings. In the case of section 501(c)(3) and 501(c)(4) organizations, it can also be an excess benefit transaction taxable under Code section 4958 and reportable onSchedule L.
Exempt Organizations (EO) Examinations has done some preliminary research in this area, reviewing tax filings and publicly available information on the 285 organizations that reported a significant diversion of assets in 2009. This initial research showed:
- Roughly $170 million in significant diversions was identified.
- Many of the cases involved theft or embezzlement, though there were many other cases where the taxpayer didn't explain the significance, as Schedule O requires.
- A handful involved Ponzi schemes.
- 82 cases resulted in civil or criminal charges against the responsible party. These are charges that were brought by the organizations involved, or by local authorities, who were outraged by the activity. They are not IRS charges.
- 47 individuals were incarcerated or served probation for the diversion of the assets. Again, this did not arise from IRS actions.
- In 9 cases restitution was paid in full.
- In 11 cases there was partial restitution.
We are now going to conduct an examination program in this area. While organizations aren't normally selected for exam based on the answer to any particular question on the Form 990, a significant diversion of assets is noteworthy. By examining these organizations we will be able to identify common indicators of serious cases and common indicators of cases where the organization was able to self-correct. The benefits of this are two-fold: First, as always, we will also report out on these results, and this will allow us to advise organizations generally on how to avoid these events. Second, it will help us refine our risk models to better target our examination resources.
In many cases like this, an exam will focus narrowly on the details of the transaction. The goal will be to pursue excess benefit transaction actions against the person(s) committing them. The examinations won't necessarily result in tax consequences to the organization itself. In some cases, the taxpayer simply didn't provide the required explanation on Schedule O. In some situations, the taxpayer did not complete Schedule O at all.
Going forward, we plan to conduct these examinations to gather more information about significant diversions and get the information we need to address the excess benefit transactions. We also will determine--
- What internal controls or good governance practices, if any, were present before the significant diversion and
- Whether and how internal controls and governance practices have been modified in order to ensure the charities' assets are properly safeguarded in the future.