Valuation of deworming gets more complicated – the IRS gets involved

It’s not just two big-time reporters and this teeny-tiny blog looking at the mebendazole issue anymore. 

It is now obvious that the IRS has been paying attention for quite some time.  On Monday their involvement hit the papers.

Two articles appeared:

William P. Barrett, from Forbes magazine, posted  IRS Audit: Big Charity Filed Misleading Tax Return

Caroline Preston, of The Chronicle of Philanthropy posted IRS Levies Fine on Food for the Hungry Over Drug Valuations.

If you have any interest in the issue of valuing GIK meds, you will want to read both articles.

On Tuesday, Mr. Barrett put up a post at his blog New to Seattle – Are certain Seattle charities in line for a visit from the IRS?

The short version is the IRS audited Food for the Hungry.  The IRS has proposed a $50,000 penalty for the 2008 form 990 claiming it was inaccurately prepared.  At issue is the valuation of donated medicines, especially mebendazole.

According to the 2008 tax return, available from Food for the Hungry here, total contributions in that year were $129.9 million.  Mr. Barrett’s article says:

But the IRS audit report … said $76 million of that was donated goods that should have been valued at only $93,000. Three-fifths of that amount was deworming medicine.

If the IRS’ claim is correct, that would reduce total revenue in 2008 from about $130 million to about $54 million.

The issue is broader and deeper than what’s visible at the moment.  It looks like there will be more attention from the IRS. 

Mr. Barrett’s article cites the Food for the Hungry’s CFO  who

..said it was his understanding that the IRS had a task force looking at nonprofit valuation issues nationally.

Ms. Preston’s article says:

The letter could signal broader IRS interest in charity drug values. The IRS has questioned the valuation practices of at least one other aid group, according to several nonprofit officials. But the organization has not announced that it has received a letter of the sort sent to Food for the Hungry.

One final thought in terms of timing. The IRS sent a letter to Food for the Hungry on January 6, according to the Forbes article.  That means the audit was underway before publication of either of the first two articles I read that started this series of posts. I would guess that means the audit was in the planning stage before the first articles were written by Ms. Preston.  Back up the timeline for however long it takes the IRS to assemble a task force and do research.

Since things are getting a lot more intense, there are a few more pieces of information to put on the table.

Some of the parties involved

The audit firm who audited the 2008 financial statements was Capin Crouse LLP.  The partner on the audit, according to both reports, was Gregg Capin from the Atlanta office.  The CFO of Food for the Hungry is Barry Gardner.

Full disclosure

I worked for Capin Crouse from 1989 through 2002.  During that time, both Mr. Capin and Mr. Gardner were colleagues of mine at the firm.  During the mid or late 1990s, I worked on the Food for the Hungry audit for a small number of hours.  Finally, since sunshine is a good thing, it is also worth noting that my firm (Ulvog CPA) and Capin Crouse are competitors in providing services to the nonprofit community.