The connection between major national charities and telemarketers should be investigated by the Federal Trade Commission for possibly abusing tax-exempt status or breaking the law, Sens. Richard Blumenthal and Herb Kohl said.
“I am writing to ask that the FTC investigate reports that telemarketers acting on behalf of well-respected charities are deploying deceptive tactics to induce individuals to donate money that is kept mostly, and sometimes entirely, by the telemarketer,” Blumenthal, D-Conn., wrote to the FTC on Nov. 30. “These practices are unethical and in some circumstances may be illegal.”
Sen. Charles Grassley, R-Iowa, said Congress and the IRS should consider stricter rules to prevent highly profitable nonprofits from avoiding taxes.
The three senators say two recent Bloomberg Markets magazine articles show that the government should take actions to prevent abuse by tax-exempt organizations.
Kohl, D-Wisc., said the Department of Justice and the Consumer Financial Protection Bureau should also probe possible nonprofit abuse.
In October, Bloomberg Markets reported that InfoCision Management Corp., the world's largest charity telemarketer, raised money for the American Cancer Society, the America Diabetes Association and other national charities while falsely telling potential contributors that 70 percent of the money raised went to the charities.
“This particular scheme is one that needs to be looked at closely by the Consumer Financial Protection Bureau, Federal Trade Commission and Department of Justice to make sure it can't happen again,” Kohl says.
The Cancer Society and Diabetes Association approved scripts for the telemarketers allowing them to lie about where donations would go, Bloomberg Markets reported.
Blumenthal asked Jon Leibowitz, chairman of the FTC, to investigate if these tactics violate the Telemarketing and Consumer Fraud and Abuse Prevention Act.
“These telemarketers use scripts approved by the charities to mislead potential donors about how much the charities keep,” Blumenthal wrote. “The scripts are misleading, stating that 70 to 75 percent of funds raised go directly to the charities when the actual number is far less.”
FTC spokesman Frank Dorman declined to comment. Greg Donaldson, national vice president for corporate communications for the Cancer Society said, “We welcome the chance to clarify the facts and will cooperate fully.”
InfoCision Chief of Staff Steve Brubaker says his company has been a dependable partner to some of America's best charities for decades and takes its obligations to them and to potential donors seriously.
“Our legal counsel has asked us not to comment on the merits of these claims other than to say we vigorously dispute these allegations and will respond accordingly in the proper judicial forum,” Brubaker said.
The Cancer Society's 2010 contract with InfoCision for a telemarketing campaign called Notes to Neighbors estimated the charity would receive 44 percent of the money raised. Solicitors used scripts, approved by the Society, falsely claiming that 70 percent of the money raised would go to the charity.
That year, InfoCision kept 100 percent of the $5.3 million it raised for the charity, according to Cancer Society filings with the IRS and the state of Maine.
The American Diabetes Association approved a script the same year for use by InfoCision telemarketers.
“Overall, 75 percent of every dollar received goes directly to serving people with diabetes and their families,” the script said.
The association's fundraising contract for that period estimated it would receive just 15 percent, with the rest going to InfoCision.
Other of the nation's largest health charities, including the American Heart Association, the American Lung Association and the March of Dimes, have hired InfoCision during the past decade. The telemarketer brought in $425.5 million for more than 30 nonprofits from 2007 to 2010, keeping $220.6 million, or 52 percent, according to state-filed records.
The Bloomberg Markets December article reported that the American Bureau of Shipping, a 150-year-old Houston-based ship inspection company, paid no U.S. income taxes on just under $600 million of profits earned from 2004 to 2010.
It paid Robert Somerville, then its chief executive officer, $21.7 million during that time. ABS allowed managers perks such as chauffeurs, chefs, maids and first-class travel. The IRS has no rules against such spending by nonprofits.
That caught Grassley's attention.
“The laws and regulations that govern tax exemption are too vague or poorly enforced,” Grassley said. “Congress and the IRS have a responsibility to tighten up the laws that undermine tax fairness.”
Other nations reject the tax-free status accorded to ABS by the IRS.
“The recognition of this type of entity as tax exempt is somewhat unique to the United States,” ABS told Bloomberg Markets in a written response to questions.
In 2010, China's State Administration of Taxation rescinded ABS' tax exemption retroactive to the beginning of 2008. ABS paid $20 million in current and back income taxes.
The South African Income Tax Court denied the ABS application for tax-exempt status in 1997. The company lost an appeal in 2008.
“The appellant simply does not qualify,” ruled High Court Judge Eberhard Bertelsmann. The company also pays income taxes throughout most of Europe.
“Just as Congress considers the corporate tax reforms other countries have enacted, it's fair to look at what those countries are doing with their tax-exempt entities,” Grassley said. “The American Bureau of Shipping's loss of tax exemption abroad should raise red flags for the IRS.”
ABS spokeswoman Jean Gould said the company fulfills a vital role of promoting safety at sea and serving the public good. “ABS has been a tax exempt entity for nearly a century and fully supports appropriate oversight of US tax-exemption law,” she said.
Grassley said these issues may become especially relevant if negotiations to avert the fiscal cliff lead to changes in the tax code.
“If comprehensive tax reform occurs, the rationale and policy behind our tax-exempt laws will be ripe for review,” he said.