What it costs to deal with a major IRS audit. Case study from Food for the Hungry.

July 2, 2015, 8:35 am

The IRS took serious exception to the methodology used by Food for the Hungry in preparing its tax return for the fiscal year ending September 30, 2008. The IRS audit of that 990 ran for years.

On March 24, 2014, the ministry announced the IRS closed their audit. The ministry says it did not have to file an amended return but did agree to change the way that it was accounting for gifts in kind.

A summary of the issues as I described them on 6/3/14:

  • In one sentence (as I understand the picture), the primary issue under audit was whether it was appropriate to value 500 mg mebendazole (which cannot legally be sold in the U.S.) at over $10 per pill when it can be purchased on the international market for one or two cents per pill. Two related issues were variance power and whether amounts paid in relation to a shipment of meds were a handling fee or a purchase price.

Now that tax returns are available through the 2014 fiscal year, we can see enough 990s to develop a case study about how much it costs to respond to a major challenge from the IRS.

Why the big deal?

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Details on FTC enforcement action against four cancer charities – 1

June 12, 2015, 9:53 am

The news coverage has died down about enforcement action taken against four charities by the FTC and every state attorney general. I’ve not seen anything that dives a deep into the accusations. This post is the start of a series of discussions on the case.

Why go into detail?

After having read through the accusation, it is obvious this case contains most of the problematic issues we have seen over the last few years in nonprofit accounting and fundraising. Off the top of my head, I don’t recall any issues under discussion in the charity world that are not present in this case. That makes this set of allegations a good case study.

The complaint can be found here. That is a public document. I claim journalist status, so will quote the document at length.

Here is the opening of the complaint, with a few comments added: Read the rest of this entry »

More followup on FTC action against 4 cancer charities

May 26, 2015, 9:02 am

There is a lot more to say on the FTC and all AGs going after four charities that were way out of line.

5/19 – William P. Barrett at Forbes – Cancer Charities Agree to Dissolve Amid Fraud Claims – Article summarizes the case by the FTC. Two of the four charities have agreed to close their doors. Three of the named individuals have agreed they will not have future involvement with charity management or even fundraising.

We did nothing wrong and we agree not to break the law again

Article points out the irony we seen these kinds of settlements. Even though the three individuals agreed to not be involved in the charity sector again during their lifetime and two of the charities agreed to be taken over by receivers and then liquidated, the charities and individuals involved denied doing anything wrong.

It is as if it’s a normal and everyday thing that individuals agree to be legally barred from involvement in their economic sector and charities agree to corporate suicide when they have done nothing wrong.

But that’s the legal dance that is necessary. Denying wrongdoing is necessary to prevent the consent degree from becoming proof to anyone who later tried to sue the charities or individuals.  Even though I understand the reason, it seems silly to those looking in from the outside.

Contested claims

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IRS closes audit of Food for the Hungry’s 2008 tax return

June 3, 2014, 6:52 pm

On March 24, 2014, Food for the Hungry issued this press release:

Food for the Hungry’s 2007 Tax Return Audit ResolvedIRS acknowledges that FH followed all laws and accounting standards

In the press release the CFO, Barry Gardner, provided the following comment:

“After an exhaustive review lasting 1,030 days, the IRS allowed the 2007 return to stand as originally filed,” said FH Chief Financial Officer Barry Gardner. “Contrary to erroneous press reports in 2012, no fine was ever levied or paid. While FH and the IRS have minor disagreements concerning certain transactions from that period, those transactions were deemed not to require revision of FH’s tax return.”

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Another explanation why meds cost so much; this ties into the GIK valuation issue

June 2, 2014, 7:37 am

This post will be deep background on the GIK valuation issue. I won’t connect the dots to the international versus US pricing issue, just lay out a few pieces of the puzzle.

One of many fascinating things I’ve learned about pharmaceuticals while blogging about mebendazol and the related valuation issues is the dramatic disparity of the prices for meds in the US and overseas. There is also a huge gap between branded and generics.

I’ve looked for data on the difference in consumption of meds and costs paid here in the US versus the rest of the world. Can’t find what I’m looking for. Somewhere sometime I saw a comment that we in the US consume 10% of all prescription meds but pay 50% of the costs. Can’t support that with anything other than hazy memory. I am fairly comfortable that the disproportionate relationship exists, even if the numbers are off.

Why does that disparity exist? Is it, perhaps, a good thing?

The underlying economic model is US residents pay for all the astoundingly huge development costs of brand new wonder drugs and the rest of the world pays the incremental costs of making another pill.

What that model does is recover the billions of dollars needed to find a new drug and motivates big pharma to look for another blockbuster.

Megan McArdle explains the issue much more clearly in her article Would you Pay $84,000 for a New Liver?

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Case study of legal and accounting costs during major IRS audit

February 19, 2014, 9:36 am

Update 2/19, 6 p.m. – Earlier today I received a reply from Food for the Hungry sharing some background information with me.  They will look at this post in more detail and get back to me.  I will share with readers whatever additional information the organization wishes to share.

Update:  IRS audit has been resolved.

A charity going through a major dispute with the IRS has incurred a lot of costs dealing with an audit.

After seeing two sets of financial statements and 990s that were restated last fall (yes, yes, I’m a little slow on the uptake), I thought about checking to see if the Food for the Hungry financials have been restated. Checked the New York AG web site and didn’t see any revisions.

I would like to use the Food for the Hungry financial statements as a case study of the costs incurred from getting involved in a tax or legal dispute.

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Mebendazole: red herring or presenting problem?

June 3, 2013, 7:51 am

Is 500mg mebendazole a red herring or a way to focus discussion on many issues surrounding GIK valuation?

GIK Valuation: The issues not being discussed is a guest post on this blog. The author starts his/her post by saying the discussion of 500 mg mebendazole is distracting us from the real issues, which are much more serious.

From Dictionary.com

Red Herring: something intended to divert attention from the real problem or matter at hand; a misleading clue.

The author and I disagree on the role of 500mb mebendazole.

I think the author’s point is that focusing on mebendazole distracts us from other issues.

I believe it is this specific med that is generating a disproportionate amount of GIK revenue. I perceive a very material portion of GIK revenue in the sector went away when this one med was revalued at the time SFAS 157 went into effect.  My guess is that a material portion of the remaining GIK revenue in the sector would go away if that one med were valued at something similar to the price on the international market.

I also think that talking about just one medicine allows us to see a host of other issues. If the NPO community can resolve the issue arising from a discussion of mebendazole, I think that most of the other issues regarding GIK valuation would fall into place.

Once we get beyond whether mebendazole is a red herring or a presenting problem, the author and I are in agreement on quite a few issues.

Issues for discussion

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