CharityWatch is calling for the IRS to start requiring charities to shine light on their international grants. Under current reporting rules nonprofits are allowed to conceal the organizational names of their international grantees on their mandatory public disclosure report, the IRS form 990. This omission is making it too easy for charities to exaggerate their work and mislead the American public. As a world humanitarian leader, it is essential that the United States require its nonprofit international aid organizations to be transparent and accountable. CharityWatch's plea to the IRS follows:

July 28, 2011

Attn: Internal Revenue Service
Re: Announcement 2011-36, Names and EINS of Foreign Grantees
From: Daniel Borochoff, President of the American Institute of Philanthropy

The American Institute of Philanthropy (AIP) at www.charitywatch.org, a nonprofit charity watchdog dedicated to helping donors make more informed giving decisions, strongly believes that nonprofit organizations should be required to publicly disclose the name and EINs of foreign grantees. It is very wrong that tax-exempt organizations can distribute hundreds of millions of dollars of aid, in many cases the vast majority of their budgets, and leave the public entirely in the dark about what specific products were donated and what organizations, if any, received them.

An accountability black hole exists with respect to how charities are allowed to report international aid distributions on their tax forms. When a charity makes a grant or distributes aid within the U.S. worth $5,000 or more it is required to disclose the name and address of the organization that received it on its IRS form 990 Schedule I. However, a charity distributing international aid is allowed in its public disclosures to hide the name and address of the foreign recipient and only disclose the major region of the world, for example, Africa, South America, or Europe, where it is distributed. Such aid is described by charities in only very general terms such as "medical supplies," "household & educational items," or "building materials." This lack of disclosure is very convenient for any charity that wants to exaggerate the value of its foreign grants, particularly if aid is in the form of donated goods or gifts-in-kind (GIK) because it knows there are no public records that an independent watchdog or donor can use to determine whether its valuation of an in-kind grant is reasonable or was even received by the reported recipient.

For example, one charity reported an international grant of over a million dollars in medical supplies and water purification systems on IRS form 990 Schedule I, which is ordinarily used to report grants to organizations in the United States. Because the grant recipient's name and EIN number were reported we had a rare opportunity to attempt to verify an international GIK grant. Upon contacting the organizational grant recipient we found out that it had not received the grant and had never heard of the charity that claimed to have made the donation.

To understand more about how many major charities have been taking advantage of the lack of disclosure of international grants to wildly overstate their work (by nearly 2,500% in the case of one charity), please read AIP's recent article, The Alice in Wonderland World of Charity Valuation. This is a serious matter because it allows groups that overstate in-kind international grants to appear to be more efficient and attractive to donors than groups that more reasonably and honestly report their values, thus causing a serious misallocation of America's charitable resources.

AIP has questioned the IRS in the past about why it would require disclosure of domestic grant recipients but not foreign ones. The response we received from an IRS official was that charities were concerned that this information could lead to terrorist attacks against a charity or its grant recipients. AIP appreciates that some charities operate in dangerous areas such as in Iraq or Somalia where it might be advisable to conceal the identity of grant recipients. But if a charity is providing aid to organizations in Japan, Haiti or other non-terrorist hotbeds, AIP believes public disclosure of recipient organizations should be required.

It is important for the IRS to not base its decision regarding the disclosure of international grants on the wishes of nonprofits and their associations. Nonprofits, like for-profits, want to avoid public scrutiny even if it helps to keep them honest and operating well. If the IRS were to ask nonprofits whether they thought the entire IRS form 990 should be abolished, many would readily say yes. Charities could come up with many reasons to eliminate the form 990 such as record keeping and reporting burdens, how the information could be misconstrued, etc… So it is understandable that many nonprofits endorse eliminating a schedule of their international grants, even if doing so is not in the public's best interest.

The U.S. government requires charities that receive funding from USAID to plaster aid boxes with a red, white and blue logo and the words "USAID from the American People" when operating in many areas, including the dangerous border between Pakistan and Afghanistan. Surely, this is more dangerous to aid workers than grant disclosures on a charity's tax form that are not even publicly available on the internet until a year or more after the fact. An anti-American terrorist or violent aid thief is far more likely to learn of a U.S. charity's presence in an area from its very publicly visible operations or by following foreign aid workers after they arrive or leave from the airport or other transportation hub, than from a charity's tax form disclosure of its prior year grants.

The fact that we live in a dangerous world is not a legitimate reason to allow nonprofits to conceal all of their international grants. This line of reasoning could lead to nondisclosure of grants to domestic universities, community centers, youth camps and other places where terrorist events have occurred. Nonprofit organizations that operate in potentially dangerous places both in the U.S. and abroad take precautions such as hiring private security to protect workers and program participants. Many international charities receive protection from the U.S. military or local police. Other charities decide that it is too dangerous to work in some hot spots. Required disclosure of international grant recipients could even serve to decrease terrorism funding. A nonprofit that is unwittingly providing aid to a charity that is operating as a terrorist front organization could more easily be discovered if the names of its grantees are reported on form 990.

The overall benefits of sunlight on the international activities of charities far outweigh the small chance that a terrorist act would be committed because of a tax form disclosure that a U.S. charity is operating in their country. Rather than giving a blanket exemption for nonprofits to avoid all disclosure of its international grantees, the IRS should follow USAID's lead and grant exceptions only in cases where a clear terrorist or other threat to a charity exists. It is vital that we do not allow the fear of terrorism to destroy the accountability and transparency of our nation's charities.