Regulation of “Classic” Community-Based Charitable Organizations

Putnam Barber,Steven Rathgeb Smith

doi:10.1515/npf-2020-0006

Abstract

Abstract Tax-exempt organizations in the United States are, in general, required to file regular reports on their operations with the Internal Revenue Service (IRS). These filings represent a significant burden for the filing organizations, are a critical source of information for many observers, and are relied upon by regulators and donors as indicators of the organizations’ commitment to achieving the wide variety of purposes for which the exemptions are granted. This paper recommends that the resources of the IRS be refocused so that greater attention can be paid to complex organizations, while the burden of preparing annual filings by simpler organization is also reduced. More generally, this paper also recommends that new attention be paid to the information collected and to its publication. It argues that the needs of the public and other regulatory agencies are not well-served by the current information and that the limitations on currently available information contribute to misunderstanding of and cynicism about the role of charitable nonprofits in American life.

Highlights

This paper arises out of a widespread feeling, which the authors share, that America’s nonprofit organizations are increasingly both under-regulated by state and federal authorities and faced with increasing demands for accountability, transparency, and evidence of efficacy from public and philanthropic funders
It argues that the needs of the public and other regulatory agencies are not well-served by the current information and that the limitations on currently available information contribute to misunderstanding of and cynicism about the role of charitable nonprofits in American life
We argue that a subsection should be added to Internal Revenue Code §501(c) specifying the responsibilities of the Internal Revenue Service for overseeing the activities of “classic” charitable organizations and that Congress at the same time add resources to the budget for Tax-Exempt and Government Entities Division (TEGE) linked to encouragement to increase scrutiny of the largest and most complex filers

Summary

Introduction

This paper arises out of a widespread feeling, which the authors share, that America’s nonprofit organizations are increasingly both under-regulated by state and federal authorities and faced with increasing demands for accountability, transparency, and evidence of efficacy from public and philanthropic funders. We propose to simplify the reporting required of the first category of organizations, the sorts of public charities we describe as “classic,” and focus the reported information on aspects of nonprofit management which are readily observable by attentive stakeholders and characterized by clear-cut standards. By these changes, we hope to increase the role of involved whistleblowers and local regulators in addressing the occasional lapses by smaller, geographically limited organizations. We urge that Congress increase decisively the resources available to TEGE while directing the agency to monitor, investigate, and, when necessary, constrain the behavior of the small number of large, extremely complex organizations which do have the capacity to do financial damage as well as injury to the populations that they claim to serve

Background

Policy Proposals

Change Reporting Requirements for Smaller Public Charities

Focus IRS Resources on the Largest Exempt Entities

Align IRS Data Collection and Publication with a Broad Range of Policy Goals

Findings

Discussion

Conclusion