Charities Face Increased Reviews by I.R.S. as Senate Considers Strengthening Oversight

By STEPHANIE STROM

Published: June 23, 2004

ASHINGTON, June 22 - As part of its contribution to a broad regulatory effort to police the nonprofit sector better, the Internal Revenue Service said Tuesday that it would examine some 400 foundations to determine whether the philanthropic institutions, which control billions of tax-exempt dollars, were complying with tax laws.

That effort officially began Tuesday with a wide-ranging hearing before the Senate Finance Committee on nonprofit practices and abuses and ways to improve oversight of charities.

Senator Charles E. Grassley, the Iowa Republican who is chairman of the committee, promised to introduce legislation in the fall to strengthen regulation at the federal and state levels, increase the responsibility of boards, stiffen penalties for conflicts of interest and other failures to comply with tax laws and enhance disclosure.

"It's obvious from the abuses we see that there's been no check on charities," Mr. Grassley said. "Big money, tax free, and no oversight have created a cesspool in too many cases."

Mr. Grassley has long had an interest in charity affairs, but the turnout for Tuesday's hearing suggested that some of his colleagues were also paying more attention. Eight senators attended the hearing at its outset, a much better turnout than the committee's staff had expected. Senator Max Baucus of Montana, the ranking Democrat on the committee, asked the most questions.

Charitable giving has come under greater scrutiny in recent years, as questions arose about how nonprofit groups administered more than $2 billion that poured in for the victims of the Sept. 11, 2001, attacks and as the amounts of new money flowing into philanthropy grew.

The effort is being driven by government agencies, state attorneys general and by some charities themselves, which worry that abuses could affect future giving.

Witnesses at the hearing cited abuses that included an unnamed New York foundation that paid for its lawyer's pleasure trip to the Vatican and a group that enabled donors to pay all their adoption expenses, normally only partly tax deductible, with tax-exempt dollars.

Two witnesses, identified only as Mr. Car and Mr. House, stole the show, testifying from behind screens and with their voices electronically modified. Mr. Car described how, as an automobile auction manager and a vehicle wholesaler, he had seen middlemen, auctioneers and used-car dealers take most of the proceeds from the sales of cars donated for charity.

His testimony supported a report from the General Accounting Office that found that charities often received far less from donated cars than donors claimed for tax-deduction purposes. The Finance Committee has proposed giving car donors a deduction equal only to the amount realized by charity rather than allowing them to claim the Kelly Blue Book value.

"The charities are not paying attention to what options they have to get the highest sale price," Mr. Car said.

Mr. House, who described himself as a financial professional with 23 years' experience "in the prime position to witness a nonprofit run amok," described how the founders of AmeriDream Inc., a nonprofit group that helps with home purchases, had diverted millions of dollars from the charity to themselves.

He said AmeriDream bought a jet that was used primarily by the organization's co-founders, whom he called Mr. Red and Mr. White, for personal purposes, including flying to Mexico to play golf. The purchase was approved by the organization's chairman, a fraternity brother of Mr. White who lived in Mr. White's basement, Mr. House said.

Mr. House said AmeriDream, which had a change of management last year, had made improvements.

Ann Ashburn, the current president and chief executive, said in a brief telephone interview that the organization, which did not know of Mr. House's testimony until reporters called on Tuesday, wanted to respond to the committee before commenting publicly. Ms. Ashburn said she would provide that information publicly on Wednesday.