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Questions about reporting on nonprofits

Question: Nederland, Texas, is not unlike many small towns in Texas in that they have an annual heritage festival. That festival is operated via a nonprofit group. Late last year, the head of that group stepped aside after years of service amid speculation that she had stolen funds (somewhere around $300,000 or so). In the last month, two members of the nonprofit board said, on background, this did in fact happen, and there was no criminal complaint made and no outside investigation or arrest.

A week ago, a lawyer for the Nederland Heritage Festival admitted in a public letter that those funds were, indeed, “misused.” He also admitted there was only an internal investigation and there were no criminal proceedings. My questions are: If a nonprofit admits that funds were misused, does it have an obligation to report that to the IRS? Would a nonprofit pay taxes on funds that went missing through misuse? Could such an admission trigger any sort of penalty or investigation on the part of the IRS? Could this threaten their nonprofit status? Could there be any legal or federal or state sanctions for failing to disclose a misuse of funds by a nonprofit? In other words, can a nonprofit sweep something like this under the proverbial rug without any repercussion?

Answer: [Provided by Mark Horvit, former executive director of Investigative Reporters and Editors] Because they got reimbursed for the money, it’s less likely any criminal case would be pursued. I say that not from legal expertise, but past experience. That’s not because it¹s a nonprofit, just because the victim would have been made whole and a lot of law enforcement agencies don’t pursue those cases.

However, I would check with the state attorney general’s office, because the AG has a unit that investigates nonprofits and keeps information on their standing. I would think they would want to look into this, if they aren¹t already doing so. We did a project on that state AG unit about 12 years ago at the Star-Telegram, and one of our findings was that they don’t investigate anything unless the public or media brings it to their attention. So if the paper wants to do that, it could trigger an investigation if there isn’t already something underway. Here’s a link to the page with more info.

Similarly, it would be worth checking with the IRS, as this could have implications to the 501(c)(3) status. The statement they put out is an admission that there was wrongdoing.

I would also want to see evidence that they’ve put accounting practices in place that will help guard against whatever happened. There are two reasons I would want to see those: to see if they organization really has taken steps, and also because those steps could give a good indication of what happened in the first place. And I would argue that that information does not violate any agreement they have with the person or people who embezzled (if that’s what it was), because this is about policies and procedures, not the specific case.

I looked at the organization’s most recently posted Form 990 (these IRS forms are required of all non-profits). It doesn’t show evidence of theft (and it wouldn’t), but it does show financial scope. I would request the most recent one from the organization itself, as this one is at least a year old (They always run a year behind).

Note: IRS Form 990s are filed by all non-profits. You can ask any non-profit to show you its latest 990, or you can access any non-profit’s 990 from Guidestar.

By Mark Horvit

Mark Horvit is head the state government reporting program for the University of Missouri School of Journalsim. He is the former executive director of Investigative Reporters and Editors. A native of Texas, Mark also worked as projects editor at the Fort Worth Star-Telegram. His journalism career includes reporting and editing duties at The News Herald (Panama City, Fla.), Corpus Christi (Texas) Caller-Times, The Houston Post, Columbia (Mo.) Daily Tribune and The Charlotte (N.C.) Observer.