Charity Watchdog: HSUS Has Violated IRS Rules

IRStroubleWe’ve long pointed to the Humane Society of the United States’ deceptive fundraising and poor marks from charity watchdogs, HSUS defending in a RICO lawsuit, and Members of Congress calling for a federal investigation of the group. It now appears that HSUS has filed years of incorrect tax returns with the IRS.

Today, Bloomberg News reports on a complaint we have filed against HSUS with the IRS, citing an accounting practice that inflates HSUS’s contributions—namely, counting donated air time as contributions. We first exposed this in July, and we have company in our concern. Bloomberg quotes a Minnesota lawyer who specializes in nonprofit tax returns who says HSUS should not be doing this practice, calling it “a relatively elementary rule.” And CharityWatch, formerly known as the American Institute of Philanthropy, is an independent charity watchdog that, in its latest report, also takes issue with HSUS’s accounting, saying it’s a big no-no (emphasis added):

HSUS produces and distributes public service television, radio, and newspaper announcements about companion animal and wildlife issues. This airtime and ad space is donated to HSUS free of charge. The charity estimates the value of these in-kind donations and records it as contributions and expenses in its tax filings. This has the effect of making HSUS appear to be a more efficient fundraiser since the value it places on the PSAs increases its reported annual donations. It also makes HSUS appear to be spending more on its programs since the value of the PSAs is included in program expenses on its tax forms. HSUS’s reported value of these donated PSAs, according to its tax forms, has increased from approximately $4.3 million in 2009, to $15.7 million in 2010, to $17.7 million in 2011. There is just one problem. Reporting donated PSAs in the financial statements of charity tax filings violates IRS reporting rules.

In fact, CharityWatch writes that HSUS’s spending on charitable programs is “much less efficient than what HSUS claims on its website.” No kidding. CharityWatch analyzes charity tax returns and tosses aside the accounting tricks to get down to how efficient a charity is. CharityWatch gives HSUS a “C-minus” grade—which, while a slight improvement over the “D” that HSUS has earned over the past two years, would still get a kid grounded by his parents.

And as for that whole “violates IRS reporting rules” thing, we figured the IRS might want to know about it. So we told them. We sent the IRS a letter laying out the evidence according to the IRS’s own instructions for completing a tax return. The evidence is pretty clear-cut to us; the IRS says that “Contributions do not include… Donations of services (such as the value of donated advertising space or broadcast air time).”

The only person it doesn’t seem clear to is Ken Berger, the head of Charity Navigator, a nonprofit rating service, who tells Bloomberg that HSUS’s violation is a small matter, “if it is an error.” If? It’s really embarrassing for the head of a charity evaluator to not even know the rules about filling out tax returns, which his own organization relies on for evaluations. But such incompetence is par for the course at Charity Navigator. Charity Navigator also overlooks an accounting trick—a legal one, but misleading—that allows HSUS to count fundraising costs as “program expenses,” which gives HSUS a higher score at Charity Navigator by making it seem more financially efficient. Tens of millions of dollars are shuffled around in this way for HSUS, and Charity Navigator looks the other way and gives HSUS a “four-star” score.

That’s not such a small matter now, is it?

And since Charity Navigator does dock the ASPCA and other charities for doing the same thing, the fact that it doesn’t do likewise for HSUS makes us wonder if there’s some funny business going on.

According to the IRS, if HSUS has filed incorrect tax returns it could be fined up to $100 per day, up to $50,000, per return—or close to $200,000 for these four years of filings. We’ll let you know if we see HSUS filing amended returns. And we’ll be curious to see if HSUS chooses to count donated PSAs as contributions on its 2012 return. We will know very soon.

Posted on 11/07/2013 at 5:00 pm by Humane Watch Team.

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  • WORSEKarma

    This is my shocked face: O.O

    I’m shocked. Shocked, I tell you, shocked.

    Shockity-shock-shock-SHOCKED.

  • Mimi Schmaltz

    And if the fines could be spent on animals instead of government…

  • MisterCadet

    Reading Ken Berger’s bio, it is clear that he is utterly unqualified to be any kind of watchdog, investigator, analyst, or reformer. Then again, Charity Navigator has never been a watchdog. Charity Navigator has never been more ethically compromised than it is today, having caved into threats by the Direct Marketing Association – and Wayne Pacelle – not to scrutinize joint cost accounting. At least the ASPCA has enough class not to use intimidation tactics. And the ASPCA has the animal rescue and investigative staff and expertise to do the work that HSUS, with just a few outside consultants and many inexperienced (though caring) volunteers, steals credit for.

    According to Animal People:

    “Charity Navigator assigns stars, like a restaurant or hotel reviewer, based on computerized number-crunching using data supplied on IRS Form 990 filings. Because Charity Navigator does not do program verification, it tends to reward organizations that have learned to game the system through stratagems such as claiming fundraising mailings are “program services” under the heading of “public education.” Sometimes Charity Navigator awards stars to charities whose filings appear to be designed to mislead, while penalizing charities whose filings include basic errors or accurately reflect temporary imbalances of program, fundraising, and administrative expense resulting from embarking on a major donor acquisition or capital campaign late in a fiscal year.”

    Please someone send Ken Berger a gift – the 2013 Animal People Watchdog Report for Animal Protection Charities. Animal People does a deep analysis, the opposite of Berger’s. Animal People’s analysis of HSUS tax returns shows that 55% of their revenue is spent on overhead. Charity Navigator: You have looked the other way and rewarded 35% (around $50 million) that HSUS pays to it’s bloated staff and the dregs of the fundraising industry. As long as you are a willing participant in all of this, you have no credibility whatsoever.

    Doug White, founder of what became Charity Navigator, recently said that it now does more harm than good. White has sharply criticized joint cost accounting abuses, and HSUS-style blather justifying that misuse of donor funds. He added that high fundraising expenses are only appropriate if a charity is just starting out. HSUS has enough money in the bank to suspend fundraising for 3 years (Charity Navigator actually rewards that). And fundraising to “save dogs and cats, puppies and kittens” is one of the easiest sells around.

    In HSUS’s case, it’s all profit, since they don’t save anything except money.

  • DC

    To recap: IRS does not allow tax free lobbying or claiming certain expenses such as donated airtime, or giving gifts to elected officials without reporting it or lobbying without registering in your state. Although it’s legal to claim “fundraising” costs and salaries as “programs” or services delivered, Charity Navigator says ASPCA can’t do that but HSUS can! Political campaigns directed at children? No one should be okay with that. HSUS does all of these things in addition to claiming the animals that Doris Day AL and the Fund care for count as HSUS animals, unless DDAL or the Fund is sued, in which case HSUS is separate. AND, there’s more, influential employees at HSUS espouse an animal rights agenda that includes no use of animals to include police horses, seeing eye dogs and pet cats. And yet, hundreds of millions of dollars come their way every year from people who say they care about animals. Boggles.