The Supreme Court has held that professional fundraisers working for an Illinois charity may be liable for fraud as a result of misleading statements made during telephone solicitations. The case, Madigan v. Telemarketing Associates, resulted from a suit brought by the Illinois Attorney General alleging that several telemarketing firms told potential donors that a substantial portion of each dollar contributed would be used for specific charitable purposes. In fact, 15% or less of donated funds was paid to the telemarketers' client charity.

The reasoning that guides the Court's written opinion is clear in principle, but may be difficult to apply in practice. The opinion carefully distinguishes previous cases in which the Court invalidated state laws that restricted the percentage of donations that could be devoted to fundraising costs or that required fundraisers to affirmatively disclose the percentage devoted to fundraising costs. In past cases, the Court has held that these types of regulations created an impermissible burden on charities' constitutionally protected speech. The Court found that percentage-based restrictions are an overly broad way of preventing fraud because this type of regulation fails to allow for the many legitimate factors that cause fundraising costs to vary from organization to organization.

In Madigan, the Court held that the invalidity of percentage-based regulation does not preclude enforcement of anti-fraud laws against fundraisers "as long as the emphasis [of the prosecution] is on what the fundraisers misleadingly convey, and not on percentage limitations on solicitors' fees per-se." In other words, fundraisers cannot be held liable simply because their fees are too high, but fundraisers commit fraud if they lead potential donors to believe that the portion of their donations going to charity is greater than it actually is.

The opinion also suggests that it may be fraudulent for solicitors to state that donations are for specific charitable purposes if the portion of the donations used for charitable purposes is so small that it is merely "incidental" to, or a "façade" for, a scheme primarily intended to enrich the fundraiser. Unfortunately, the opinion provides no concrete guidance on the contours of the important gray area between fraudulent misrepresentation and fundraisers' common embellishments regarding the intended use of donated funds.

Some fundraisers have expressed concern that the case could act as a "Trojan horse" encouraging states to try to impose limits on fundraising expenses through prosecution for fraud, in lieu of enacting laws specifically aimed at fundraising costs. Indeed, some language in the opinion could provide superficial support for such an approach, even though it clearly is not the message the Court intended to convey.

Despite the Court's repeated statements that failure to disclose high fundraising expenses is not unlawful per-se, this may be a good time for charities to consider how to justify the cost of any fundraising campaign that is unusually expensive. For example, the opinion indicates that for an organization that conducts public education, a fundraising campaign incorporating educational communications may legitimately cost more than a campaign that only requests donations, since the educational component of the campaign itself serves a charitable purpose.

One positive sign for charities is that the Illinois Attorney General seems to have made no attempt to hold the recipient charity responsible, although it is not clear to what extent the charity was involved in the fundraising or approved the fundraisers' scripts. Nevertheless, the case strongly reinforces the wisdom of carefully reviewing telemarketing scripts, direct mail, and other fundraising materials for literal accuracy. For example, the opinion highlights the subtle but important distinction between a representation that funds will be given to charity, and a representation that the donations will be used for specified charitable purposes. If donations are solicited based on the promise that they are to be used for a specific purpose, legal problems, as well as a sticky public relations ordeal, could result if the funds are not used for that purpose.

By Paul J. Tanis

Reality Checks: Do You Trust Your Payroll Provider?

According to press reports, a D.C. area payroll company, FirstPay, abruptly closed its doors. Many clients of FirstPay have been alarmed by IRS notices that they owe significant amounts of back employment taxes, and that penalties and interest are accruing, on amounts the organizations thought had been paid by FirstPay.

These organizations face difficult and potentially expensive problems because employers retain legal responsibility for ensuring payment of payroll taxes despite having hired a payroll service. While the IRS has not said whether it is investigating FirstPay, it has indicated that it will work with the taxpayers who may have been harmed. It is too early to say what accommodations the IRS will agree to; however, as a general principle, penalties do not apply to failures to pay taxes due to reasonable cause. Taxpayers who cannot afford to pay all taxes at once may apply for an installment payment plan.

Employers who are concerned should be in direct communication with the IRS and state tax offices, even if their payroll firm promises to provide these services as well. Also, employers should make sure that the IRS has the organization's – not the payroll company's – address on its record, so that potential notices of owed taxes will go directly to the employer.

To verify the payment of federal employment taxes, you may call the IRS customer service line for nonprofit organizations: 1-877-829-5500. The line is open from 8 a.m. to 9:30 p.m., Eastern Time. If a payroll company has changed your organization's address of record with the IRS, you will need to file a Form 8822, downloadable from the IRS website: http://www.irs.gov/pub/irs-pdf/f8822.pdf.

If you have questions or concerns about state income and unemployment tax, you may contact the individual states directly as well. Here is the following information for the District of Columbia, Maryland, and Virginia for the past fiscal year:

In the District of Columbia, to check that your organization paid the appropriate amount of tax, contact the Business Tax Service Center at (202) 727-4829. D.C. organizations should separately check proper payment of unemployment taxes by contacting the Department of Employment Services, (202) 724-7000.

In Maryland, concerned employers may contact the call center at the Controller's Office: (410) 767-1313.

In Virginia, the Virginia Department of Taxation may be contacted at (804) 367-8037, or online at http://www.tax.state.va.us. In many cases, Virginia corporations may check the payment of employer withholding and unemployment tax on the Internet.

Owing back taxes is always unsettling. This unfortunate news for former clients of FirstPay is a opportune reminder for employers to keep direct lines of communication with the IRS and state tax departments, no matter how much confidence your organization has in its payroll company.

By Miguel de Baca





This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.

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