Last Friday, a group of senators including Elizabeth Warren sent a letter to IRS commissioner John Koskinen and education secretary Arne Duncan demanding action to prevent “sham nonprofits” in higher education from making a mockery of nonprofit accountability. The senators’ action could prompt the agencies to take a closer look at for-profit colleges that have converted to nonprofit status, and lead to a process for more carefully reviewing nonprofit claims by entities using federal college aid.
This is welcome news, and perhaps the best development in the busy three weeks following the release of the TCF report, The Covert For-Profit. (Release of the report led to coverage in the Washington Post, The Atlantic, Buzzfeed News, the Chronicle of Higher Education and the Chronicle of Philanthropy, InsideHigherEd, Politico, Time, US News, Republic Report, the Hechinger Report, the New York Times, and several others outlets including, with the best accompanying photo, Nonprofit Quarterly.)
According to nonprofit law expert Philip Hackney, the senators’ efforts in bringing the existence of covert for-profits to the attention of the Department of Education and IRS might yield results. Similar past consumer abuses, he said, have been successfully addressed by shared action of relevant agencies along with the IRS. Hackney, who joined me for a briefing of congressional staff on Friday, cited as examples credit counseling and down payment assistance scams that took advantage of complex financial issues to offer vulnerable people services that actually proved to be nightmares. These troubling situations eventually were ameliorated via agency action.
Hackney, who used to oversee nonprofits for the IRS, described the covert for-profit colleges as a case of “regulatory arbitrage”: businesses cloaking themselves as charities in order to escape scrutiny. Nonprofits that have converted from for-profit business are particularly susceptible to abuse, he said, because former owners have a difficult time fully accepting that the entity no longer belongs to them, it belongs to the public. He warned, however, that if the abuses exposed by The Covert For-Profit were not addressed quickly, the strategies that the former owners had used to enrich themselves could start spreading like an infection to other nonprofit organizations.