What a Weakened, Underfunded IRS Means for Fraudsters

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In The New York Times, Ken Stern tells the story of how John Donald Cody, a former intelligence officer, put his expertise to use cheating charitable Americans. Under the assumed identity of Bobby Thompson, Cody set up a nonprofit called the US Navy Veterans Association and contracted with telemarketing firms to raise around $100 million in charitable contributions — ostensibly, for needy veterans. The organization, he claimed, had 41 state chapters, 66,000 members and was headed by one Jack L. Nimitz. None of that was true. The organization consisted only of Cody. The charity’s claimed purpose was also false. Most of the money it raised went to the telemarketers and much of the rest went to Cody or to Republican lawmakers he supported. Very little went to veterans.

This story was unwound in 2010 by two reporters at The Tampa Bay Times. Coda fled Florida, where he had run the “charity” out of his duplex apartment in Tampa. In April, 2012, the authorities found him in Portland, OR, where he was holding onto $981,650 — and almost two dozen fake ID cards — in a storage unit.

But none of these details are the most surprising part of this story. The most surprising part, Stern writes, is that most of what Cody did was “probably legal, or at least not specifically illegal.”

The alleged fraud was not that very, very little money ever went to Navy veterans. In fact, the fund-raising explicitly stated that a large portion of donations would go to cover telemarketing and other costs. Mr. Cody ran afoul of the law because he filed registration documents that contained false statements, because he stole the identity of the real Bobby Thompson, and because he pulled money from organizational accounts for his personal use. The irony is that he could have accomplished virtually his entire enrichment scheme without ever violating the law — and others have figured that out.

The I.R.S.’s Exempt Organizations Division, which is responsible for supervising the charitable sector, is chronically understaffed. It can’t do much more than process the routine and voluminous reporting of the more than 1.5 million American nonprofits, and keep up with the tens of thousands of applications filed each year to start new charities.

State and local authorities are in no better shape. Joel L. Fleishman, a professor of public policy at Duke, estimates that there are fewer than 100 full-time state charity regulators, far too few to exercise any real oversight.

In the Navy Veterans case, amazingly, the I.R.S. did undertake one of its rare field audits. And yet, despite the fact that the main office was a trailer, its state offices were empty lots or postal drops, and its board of directors and C.E.O. a total fiction, the I.R.S. in 2008 gave the association a “clean bill of health.” It wasn’t until the two reporters came sniffing — first curious about the political contributions and subsequently intrigued by Mr. Thompson’s obvious dissembling — that the real story began to emerge.

When it comes to frauds like these, it is neither the law nor the regulators that are the best line of defense; it will always be the careful application of caveat emptor by potential donors. This isn’t easy: there are approximately 59,000 charities in this country with the word “veterans” in their names. Only a few people can claim the expertise to say which are the best, let alone which are trustworthy.

There are two takeaways from this tale, which will probably someday be turned into a Coen brothers’ film.

First: The government agency that’s supposed to be monitoring not-for-profit groups which pour millions into our elections is too understaffed, too overworked and backed by laws that are too weak to catch and prosecute such obvious fraud as this. Even so, the IRS came under fire from the political right last spring for looking at political organizations too closely. The Obama administration moved to strengthen the IRS’s abilities to clamp down on these groups this week.

Second: If you want to give this holiday season, there is a responsible way to do it. Stern, a former NPR executive, recommends the GiveWell website “to find organizations with a track record of a effectiveness” to “ensure that money reaches those in need.”

John Light is a writer and journalist sometimes based in New York. He writes a lot about climate policy, both inside and outside of the US. He was a former associate digital producer for Moyers & Company. His work has been supported by grants from The Nation Institute Investigative Fund and the Alfred I. duPont-Columbia Awards, and has been included in ProPublica's #MuckReads collection. You can follow him on Twitter at @LightTweeting.
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  • JPT

    Also, if the IRS was actually doing the President’s political bidding, where the heck are Mitt Romney’s tax returns?

  • Anonymous

    Pretty sad.

    Catholic Relief Services ranks A+ on CharityWatch.org (about 95% of donations going to the needy).

  • Leslie A.

    What is it about Tampa, Florida and Portland, Oregon that make it so easy for scam artists to do their thing? Craig Berkman, previously head of the Republican party in Oregon and a candidate for governor at one time, is now sitting in a federal holding facility in New York for multi-million dollar scams in both Oregon and Florida. Todays Oregonian reports that he may do 10 years in prison — or not. At least he didn’t blatantly go after veterans. He developed a Ponzi scheme that targeted “greed,” was extremely complex and went on for years before being untangled. I look at that case and I see part of the blame lying with people whose desire to enrich themselves quickly without doing their homework ultimately brought Berkman down and lost millions for those who invested. Hopefully these two cases will serve as examples for anyone tempted to invest without getting good outside advice. In the meantime, as one who worked hard for a journalism degree, I say “let’s hear it for those investigative reporters who, going back probably further than Richard Nixon, ferret out the bad guys (and gals) as often as possible.”

  • http://stupidgitsaysso.blogspot.com/ Anonymous

    Just went to the GiveWell website – it seems much of their info is out of date, the website is extremely hard to navigate and find what little info they do have on charities , and and they don’t review many of the quality charities I’m personally familiar with that do great work. The site is a great idea, but seems to be poorly executed. Not sure if there are better options, but figured I’d post this for others so they don’t waste their time trying to use GiveWell’s site.

  • http://stupidgitsaysso.blogspot.com/ Anonymous

    They seem to only review a small fraction of the charities out there – and most reviews are outdated. Definitely not a great resource.