After Madoff: What Should Charities and their Stakeholders Be Doing in a New World of IRS Transparency?

March 22, 2009

© 2009

One of the most perplexing and disquieting group of investors/victims of the infamous Ponzi scheme of Bernard L Madoff is the long list of charitable organizations, many of them large and well-respected, that have reportedly lost many millions of dollars through investing with him. A number of the charitable entities that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code have even been forced to abruptly cease their operations.

This article will examine some of the unique aspects of 501(c)(3) tax-exempt charities that made them attractive targets for Madoff, some of the mistakes that were made by those with responsibility for charitable assets, and opportunities for all charities and their stakeholders to better protect themselves in the future.

These matters coincide with the new and far more comprehensive and transparent annual reporting obligations of 501(c)(3) organizations on Form 990 with the Internal Revenue Service. While many charities will view the new Form 990 as a burden and extra work, the Form 990 can be a useful vehicle to repair charitable images damaged by Madoff or other events and to bolster charitable governance and compliance practices and reputations. Filed Forms 990 are universally available for review and copying from the internet. Later in this article information will be provided about how the new Form 990 can be used advantageously by charities and how anyone can obtain copies of them.

Who are the Stakeholders that were affected by Madoff?

A charity has many stakeholders. For example, a non-profit hospital’s stakeholders may include donors, patients, physicians, employees, vendors, the governing board, the community, government, among others. The primary stakeholders that will be a focus of this article are its donors, the intended beneficiaries under its mission and the governing board or other management that is charged with the fiduciary duty of enabling it to achieve its stated mission. The presence of a mission, such as the provision of charity care by a tax-exempt hospital, distinguishes a 501(c)(3) organization from a profit-oriented business entity.