Fraud in name of charity spurs lawmakers to revisit the law

By PEGGY McGLONE
STAR-LEDGER STAFF - WASHINGTON

Congress must crack down on fraudulent activities within the nation's charitable organizations by increasing enforcement of tax codes and tightening laws governing exemptions, lawmakers said yesterday during a wide-ranging hearing.

The U.S. Senate Finance Committee hearing focused on abuses that may occur at up to 10 percent of the nation's 1.6 million charities. The abuses - ranging from inept oversight by volunteer boards of trustees to the willingness to become partners in tax shelter schemes - cost the nation billions of dollars each year, Internal Revenue Service Commissioner Mark Everson said.

"Far too many charities have broken the understood covenant between the taxpayer and nonprofits: that charities are to benefit the public good, not fill the pockets of private individuals," said Sen. Chuck Grassley (R- Iowa), the committee's chairman, at the start of the three-hour proceeding.

Another area of fraud involves the use of charities by third parties for individual tax benefits, lawmakers said.

One of the high-profile cases before the committee involves New Jersey philanthropist Herbert Axelrod, whose 1997 gift of a quartet of Stradivarius stringed instruments to the Smithsonian Institution sparked an inquiry by the Senate committee in April. Axelrod is in jail in Germany, awaiting extradition to the United States to face charges related to tax fraud.

Although the committee did not take up the Axelrod case yesterday, Grassley, speaking after the hearing, said his panel is continuing its investigation into Axelrod's donations - and his $18 million sale of 30 stringed instruments to the New Jersey Symphony Orchestra last year - and will ask for additional information as the review progresses.

"It's a symptom of a bigger problem, just like the $600 toilet seat was for the Defense Department," said Grassley about what Axelrod claimed was a $50 million donation to the Smithsonian. The value of the quartet has been questioned.

Everson said reinvigorating IRS enforcement is a major priority. The nonprofit sector is growing rapidly - some 100,000 tax-exempt organizations are added to the rolls each year - and only about one in 200 filers is audited.

William Josephson, assistant attorney general in charge of charities for the New York State Department of Law, called for reforms to include an overhaul of the Form 990 federal tax return required of nonprofit institutions.

The Senate committee is considering revisions to be introduced as legislation this fall, Grassley said.