Prosecuting Nonprofit Fraud through Exec’s Personal Tax Return?

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May 17, 2016; The Gazette (Cedar Rapids, IA)

The executive director of a small Iowa charity has pled guilty to falsifying his 2013 personal tax return by failing to report more than $114,000 he stole that year from World Ambassadors, Ltd. World Ambassadors, founded in 1993 to provide international students with housing, is a nonprofit registered with the state of Iowa and run from his home by Jon Peterson. The IRS automatically revoked the organization’s federal tax exemption in 2010 for failure to file Form 990 returns for three consecutive years.

Peterson admitted to diverting 99 percent of donations to World Ambassadors between 2010 and 2014, totaling almost $500,000, to his personal checking account to support a sex addiction he says began in 2005. In addition to donations, Peterson told prosecutors he went into debt supporting his addiction using credit cards and home equity lines of credit.

This story is noteworthy for a few reasons, including some missing key facts. We don’t know whether World Ambassadors achieved mission-related success from 1993 until 2009, but based on Peterson’s admissions and the IRS revocation of tax exemption, it’s safe to say that it wasn’t operating from 2010 to the present. Was this a longstanding charity scam, or is it a case of an individual falling prey to addiction and causing damage to himself and others, including his nonprofit and its stakeholders, as a result? The federal prosecution makes no mention of the organization violating the law, or Peterson violating the law in his role as World Ambassador’s executive director—the case centers on Peterson as an individual taxpayer. Did the charity figure into the investigation, or was it merely a source of personal income on which taxes were not paid? What were World Ambassadors’ 30-40 annual donors from 2010-2014 told about their gifts’ deductibility and the uses of their gifts?

One tempting takeaway is that nonprofits and their executives are at risk of federal prosecution for serious misdeeds, regardless of organization size and executive compensation. Unfortunately, the facts of this case don’t support that conclusion. Frankly, we would have liked to see a prosecution of Peterson and World Ambassadors for misappropriation of charitable assets, potential misrepresentation of tax-exempt status, excessive compensation, and governance-related violations of the IRS Code. Maybe it’s a prosecutorial decision like those that happen in organized crime cases—there isn’t enough certainty to secure a conviction for theft and other charges, but not paying taxes on the ill-gotten gains is a slam dunk.—Michael Wyland