Nonprofit fraud isn't surging. Enforcement is

The topic of nonprofit fraud is garnering significant media attention currently.

Federal authorities in Minnesota have conducted a major prosecution involving one of the largest alleged fraud schemes related to the COVID-19 pandemic, in which multiple nonprofits and individuals are accused of misappropriating approximately $250 million from a federally funded child nutrition program.

In 2025, after three years of investigation, the defendants were convicted of diverting funds by fabricating meal counts and submitting fraudulent reimbursement requests, using the proceeds to finance luxury homes and vehicles. Additionally, there are ongoing federal probes into potential fraud at other nonprofits serving children in Minnesota.

In a notable development in April 2026, the Department of Justice under the Trump administration indicted the Southern Poverty Law Center, a renowned civil rights nonprofit, on fraud allegations which the organization disputes. This indictment has raised alarms regarding the increasing federal oversight of nonprofits, especially those engaged in activities that may be viewed unfavorably by the government.

Beware of false claims

The Department of Justice has reported achieving settlements and judgments amounting to over $6.8 billion in 2025 related to the False Claims Act, marking the highest figure recorded to date.

The False Claims Act, originally enacted in 1863, empowers the government to take legal action against individuals or organizations that intentionally submit a “false claim”—essentially unfounded requests for taxpayer funds, either through government grants or reimbursements for service contracts.

The Internal Revenue Service (IRS) characterizes nonprofit fraud as the inappropriate use of an organization’s assets, which includes activities such as embezzlement and theft.

"Public money and tax-exempt status demand public accountability," stated Treasury Secretary Scott Bessent in support of the Trump administration's increased scrutiny of nonprofits. Furthermore, he emphasized the need to terminate "the days of concealing fraud, abuse, and extremist activity behind convoluted nonprofit structures."

As an accounting professor focused on nonprofit fraud, I perceive the indictment of the SPLC and similar actions as part of a broader trend towards enhanced government scrutiny of nonprofit organizations and their charitable endeavors.

More training needed

Despite assertions from Bessent, there is a lack of definitive data regarding the prevalence of nonprofit fraud compared to corporate fraud or fraud committed by government employees.

According to a 2024 report from the Association of Certified Fraud Examiners, organizations, including both companies and nonprofits, incur approximately 5% of their annual revenue due to fraud.

The report indicated that the average loss from a reported nonprofit fraud case is roughly $76,000, which is slightly more than half the average loss of $145,000 observed across all fraud cases, encompassing incidents involving both private entities and government agencies.

The Association of Certified Fraud Examiners has also determined that nonprofit organizations provide less training for their staff to recognize potential fraud risks compared to their counterparts in other sectors. This gap may result in nonprofit personnel being less equipped to identify and address fraud compared to employees in private businesses and governmental entities.

Only 52% of nonprofit staff members report having received any training focused on fraud awareness and risk, contrasting with 83% of employees from publicly traded companies.

Internal vs. external fraud

Once established with a purpose recognized by the government, such as education, religion, science, or aiding those in need, charities apply to the IRS for tax-exempt status.

All charities in the United States, with the exception of churches, are mandated to submit annual Form 990s to the IRS to retain this status. A critical requirement of these forms includes reporting any "significant diversion of assets" identified since the last filing.

A diversion of assets refers to any instance where funds have been misappropriated from a nonprofit, thereby diminishing the resources available for fulfilling its organizational objectives.

The FBI adopts a broader definition of nonprofit fraud that additionally encompasses external fraud and actively prosecutes individuals accused of such offenses.

Common external fraud cases are often characterized by the establishment and operation of fraudulent charities—entities that solicit donations while essentially functioning as scams, allocating minimal or nonexistent resources for legitimate charitable activities.

For instance, a charity known as "Providing Hope VA" raised over $9 million in 2023 with the purported aim of assisting homeless veterans. Instead, these funds were misappropriated for personal use by its president and sole board member, James Arehart, who was sentenced to 21 months in prison and required to repay the stolen funds in 2025.

Subsequently, Providing Hope VA was dissolved following Arehart's conviction for fraud.

The Donald J. Trump Foundation is another charity that was closed as a result of fraud-related investigations, ceasing operations in 2019 after New York state authorities ascertained that it had unlawfully utilized charitable contributions for political purposes.

State of nonprofit fraud policing

Typically, nonprofits are established when their founders submit documentation to state bodies.

Consequently, the oversight responsibility for these organizations predominantly falls to state attorneys general rather than federal agencies. Historically, state governments have allocated limited staff and financial resources to curb nonprofit fraud, thereby restricting their ability to oversee the charitable sector effectively.

According to the latest comprehensive survey of state regulators conducted by the Urban Institute and Columbia Law School in 2016, only about 355 individuals were employed to monitor charities across 48 out of 56 U.S. states and territories. Most state offices utilized fewer than 10 full-time employees.

Approximately one-third of states did not even have a single full-time employee dedicated solely to ensuring proper management of nonprofit funds or ensuring adherence to ethical and financial responsibilities by nonprofit operators in their states, as indicated in the survey.

Certain states exhibit greater commitment to overseeing and penalizing nonprofit fraud. For instance, the New York Attorney General's office produces an annual report that evaluates hundreds of nonprofit fundraising campaigns. This report, titled "Pennies for Charity," scrutinizes professional fundraising efforts to determine the actual funds that charities receive after compensating the professional fundraisers.

Federal government's role

The federal government has a role in this arena as well.

The IRS provides a degree of oversight over nonprofits through the requirement of filing Form 990. Moreover, it conducts audits of certain nonprofits.

In 2024, the IRS audited approximately 660 nonprofits that submitted Form 990, in contrast to the estimated 1.9 million tax-exempt organizations in the nation. The IRS has the authority to impose penalties or revoke a charity’s tax-exempt status in instances of serious violations, including failing to submit Form 990 for three consecutive years, engaging in overt political lobbying, or misappropriating funds meant for public benefit.

In cases of substantial suspected federal fraud or instances where harm has impacted individuals across multiple states, the federal government may intervene. The Department of Justice may take on investigations and prosecutions under these circumstances. Historically, federal investigations into nonprofit fraud had been infrequent, making the SPLC indictment an exceptional occurrence.

In this instance, the FBI and IRS conducted an investigation into the charity and subsequently referred the matter to the Department of Justice for prosecution. In a separate action, the Alabama attorney general initiated a civil investigation into the SPLC for potential violations of state charity regulations.

Donor precautions can be counterproductive

Several organizations evaluate nonprofits to aid donors in making informed choices, including Charity Watch, Candid, and Charity Navigator.

Many of these organizations assess a charity’s quality based on the proportion of their funds allocated to overhead costs. Overhead encompasses essential expenses such as fundraising, accounting, advertising, media outreach, and other costs necessary for charities to operate effectively and expand their perceived "impact." Salaries and benefits for certain employees may also be included, depending on their responsibilities.

This emphasis on minimizing overhead expenditures can lead U.S. charities to deprioritize fraud prevention and detection efforts.

Nonprofits may also hesitate to report suspected fraud or theft due to fears of reputational damage among donors, which could subsequently affect future funding prospects.

Research has indicated that donations tend to decrease following the reporting of fraud cases by charities, and this decline is exacerbated when media coverage highlights such incidents. The study published in 2023 further found that donors were less likely to withdraw funding from nonprofits affected by fraud if those organizations exhibited transparency, successfully recovered stolen funds, and enacted preventive measures against future misconduct.

Moreover, the Association of Certified Fraud Examiners emphasizes the importance of transparency and corrective actions following fraud incidents in any context.

The association also advocates for both entities and nonprofits to establish procedures for analyzing spending and instituting whistleblower hotlines. While there are potential advantages to increased fraud monitoring within nonprofits, the trade-off against spending funds to support their charitable missions must be carefully considered.