Monday, May 16, 2005

Advance America's Tax Returns Misleading and Deceptive

An analysis conducted by Advance Indiana of the tax returns filed by Eric Miller’s Advance America organization since 1998 reveal that the organization attributes but a small fraction of its activities to lobbying despite its strong lobbying presence at the Indiana State House. Between the period of 1998 through 2003, Advance America attributed as little as three percent (3%) and no more than seven percent (7%) of its annual expenses to lobbying activities. As discussed in a previous post, Advance America has developed a very sophisticated direct and grassroots lobbying effort to influence legislation in Indiana. Its activities are centered almost entirely around its efforts to advance a conservative, religious legislative agenda, even though it describes itself as a nonpartisan, educational organization. The lobbying expenditures reported in the organization’s tax returns are misleading, if not deceiving. If the organization had been fairly reporting the extent of its lobbying activities throughout this period, the organization and its manager would have been subject to an excise tax penalty and ultimately, the revocation of its tax-exempt status.

As a 501(c)(3) tax-exempt organization, Advance America is permitted to engage in lobbying activities so long as it does not devote a “substantial part” of its activities to influence legislation. Tax-exempt organizations which engage in limited lobbying activities are permitted to make an election whereby their lobbying activities are governed by expenditure tests in lieu of being subject to the 501(c)(3) “substantial part” test. Advance America has made the so-called 501(h) election. This election applies a sliding scale of permissible “lobbying nontaxable amounts”, which include both total and grass roots lobbying. These amounts are deemed insubstantial, and expenditures under the nontaxable amount are considered “excess lobbying expenditures.” Organizations that make the 501(h) election will lose their tax-exempt status only if the amounts spent on lobbying normally exceed 150% of either of the grassroots or total nontaxable amounts over a four-year period. If Advance America did not make the 501(h) election, there is absolutely no doubt that it would be deemed an “action” organization and, therefore, not entitled to tax-exempt status.

Under the “substantial part” test, if a substantial part of an organization’s activities involve attempting to influence legislation, it is considered an “action” organization. IRS regulations will regard an organization as attempting to influence legislation if it does the following: contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation; or advocates the adoption or rejection of legislation. Advance America engages in all of these activities. IRS regulations further provide that an organization will be considered an “action” organization if it has the following two characteristics: its main or primary objective or objectives (as distinguished from its incidental or secondary objectives) may be attained only by legislation or a defeat of proposed legislation; and it advocates, or campaigns for, the attainment of such main or primary objective or objectives as distinguished from engaging in non-partisan analysis, study or research and making the results thereof available to the public. Without the pursuit of its right wing religious legislative agenda, Adavance America could not achieve its objectives. Under either of these tests provided in the IRS regulations, Advance America would be considered an “action” organization; however, since it has made a 501(h) election, full and honest disclosure of expenditures by the organization is necessary to determine the organization’s tax-exempt status. By allowing organization’s like Advance America to make the 501(h) election, the organization can use the election as a loophole by simply under-reporting its actual lobbying activities. That is precisely what our analysis has found.

Between the period 1998 through 2003, Advance America reported annual revenues ranging from a low of $653,321 in 1998 to a high of $886,549 in 2000. During this same period, the organization reported annual expenditures ranging from a low of $655,400 in 2003 to a high of $865,238 in 2000. Of those expenditures, Advance America attributed as little as 3% and no more than 7% of its expenditures to lobbying expenditures, whether in the form of direct or grassroots lobbying. Under IRS regulations, Advance America can spend no more than $100,000 plus 15% of its exempt purpose expenditures on lobbying in excess of $500,000. The share of its grass roots lobbying expenditures cannot exceed $25,000 plus 3.75% of its exempt purpose expenditures in excess of $500,000. In none of the years reported did Advance America’s lobbying expenditures exceed its nontaxable lobbying amount. It in fact reported substantial excess nontaxable lobbying expenditures for this period. The tax returns filed by the organization for this period showed the following lobbying expenditures:

Year Direct Grassroots Total Exp.
1998 $15,055 $31,844 $46,899
1999 $22,603 $29,572 $52,175
2000 $13,981 $17,650 $31,631
2001 $26,318 $17,074 $43,392
2002 $22,374 $15,596 $37,970
2003 $13,097 $11,940 $25,037

The organization’s tax returns leave one with the impression that it devotes very little of its activities to influence legislation, notwithstanding its vast lobbying activities in Indiana. By any objective standard, it is inconceivable that the organization’s actual lobbying expenditures for this period could be so insignificant.

With each tax return, the organization is required to provide a “clear and concise” statement of its exempt purpose achievements for the tax year being reported. This is to include the number of clients served and publications issued, or discuss those achievements that are not measurable. Advance America’s returns state that the organization’s primary exempt purpose is education. The returns list only two ways the organization achieves its exempt purposes: seminars and education and lobbying; no further information is provided about how it achieves its exempt purposes, seemingly short of the disclosure detail required under IRS regulations.

IRS regulations require 501(c)(3) organizations to detail how their exempt funds are spent during the tax year being reported. Tax-exempt organization accounting practices separate spending into three areas: (a) program services, which are activities that directly achieve or promote the organization’s tax-exempt mission; (b) fundraising, which includes money spent in efforts to attract or process donations and grants; and (c) administrative, which includes staff salaries, office maintenance and other expenses that are incurred even in the absence of tax-exempt activities. Advance America’s spending in these three areas for the time period of 1998 through 2003 is as follows:

Year Program Fundraising Administrative
1998 $71,654 $0 $762,521
1999 $110,802 $0 $681,795
2000 $311,257 $ 26,044 $527,937
2001 $178,792 $107,233 $544,596
2002 $344,486 $ 87,998 $335,416
2003 $355,015 $ 70,581 $229,867

It is remarkable that Advance America reported only $71,654 in program services expenditures in 1998 compared to $762,521 in administrative expenditures. Program Services, which includes lobbying expenditures, soared after 1998 reaching a high in 2003 at $355,015. During this same period, expenditures attributable to administrative costs dropped precipitously from $762,521 in 1998 to $229,867. The organization spent nothing in fundraising during 1998 and 1999 according to its tax returns; however, it spent nearly $200,000 on fundraising during the four-year period of 2000 to 2003. The accounting differences over this period are extremely unusual, particularly since the organization’s activities and management remained constant during this period.

It should be observed that the relative efficiency of a tax-exempt organization is often determined by comparing the proportion of total expenses that is spent on program services, which should be high, to the proportion spent on fundraising, which should be low. The Council of Better Business Bureaus “Standards for Charitable Solicitations” states, “reasonable use of funds requires that, a) at least 50% of total income from all sources be spent on programs and activities directly related to the organization’s purposes; b) at least 50% of public contributions be spent on programs and activities described in solicitations, in accordance with donor expectations; c) fundraising costs not exceed 35% of related contributions; and d) total fundraising and administrative costs not exceed 50% of total income.” In 1998, the organization spent just 11% of its reported revenues on program services and only 14% in 1999, falling well below the BBB’s standard. Thereafter, the organization’s reported program service expenditures increased, eventually reaching the magical number of 50% of its reported revenues in 2003. Its administrative expenses represented 91% of the organization’s administrative expenses in 1998, but by 2003, administrative expenses represented just 35% of its total expenditures. Fundraising expenditures were well within the BBB’s standard for the period analyzed.

With virtually little change in the organization’s operations and management during this period, serious questions are raised by this analysis of the organization’s accounting practices. The organization’s tax returns were prepared by the Indianapolis certified public accounting firm of Clark & Leucht, P.C. The books of the organization were always reported as being in the care of Eric Miller, who was executive director at all times covered by this analysis. Under penalties of perjury some of the tax returns were signed by Eric Miller, while others were signed by the organization’s secretary-treasurer, Dr. Warren Dafoe of Indianapolis. In each of the tax years analyzed the organization obtained an extension of time to file its annual return.

A complete and thorough audit and investigation of Advance America’s organization is the only way the public can be satisfied that Advance America has not unlawfully abused its tax-exempt status. Advance America’s tax-exempt status is a privilege, not a right. The taxpayers have a right to know that its government is not subsidizing, directly or indirectly, any organization whose substantial activities are directed toward influencing legislation, or the election or defeat of particular candidates. Advance Indiana’s analysis of Advance America’s activities demonstrates that the organization’s only purpose is to advance its right wing religious legislative agenda in violation of it 501(c)(3) charter. Fairness and justice require that its charter be revoked.


Active Mind said...

I am not surprised by this information at all. The question is, how do we encourage an audit of this organization's status? Do we contact the IRS or Indiana Department of Revenue?

Gary R. Welsh said...

Thanks for your comment. The IRS is the appropriate agency to report a violation by a non-profit organization of its tax-exempt status. Any citizen may report tax fraud to the IRS's crime unit. Organizations in Indiana are covered by the office in Kansas City, MO. You can report violations to the following: Internal Revenue Service Center, Attention: CI, Kansas City, MO 64999. The letter should detail the specific allegations you allege make the organization in violation of federal tax law. A letter from an elected U.S. representative, such as Rep. Julia Carson, to the IRS Commissioner in Washington requesting an investigation of an organization is also recommended. Preferably, the letter to the IRS Commissioner would come from a Republican official as opposed to a Democrat official. In Indiana, you are probably going to have to settle for a Democrat official.