Are We Better Off?

Posted by Laura Otten, Ph.D., Director on June 23rd, 2011 in Articles, Thoughts & Commentary

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Recently, the IRS published the list of the 279,595 nonprofits which had their nonprofit status revoked for failure to file a Form 990 for at least three consecutive years, a requirement put forth in the Pension Reform Act of 2006. Taken in the larger scheme of things, 280,000 out of a total of approximately 1.6 million nonprofits is about 18%.   Since that release, newspaper headlines around the country have been reporting the local numbers, which vary depending upon whether reporting on a town, county or state:  almost 900 in South Dakota and nearly 14,000 in Florida; almost 200 combined in Horry and Georgetown Counties, South Carolina and 26 in Coshocton County, Ohio; the City of Dana Point, California, lost 24, while Philadelphia lost 1,968.

Should we mourn or rejoice?  Neither, really.  On the one hand, there are too many nonprofits in this country, so separating the wheat from the chaff is much needed.  With too many there is unnecessary duplication of services, competition for increasingly limited resources, a wasting of those board members that really want to do board work, and much more.  Unfortunately, however, almost half (134,615) of these “revoked” nonprofits hadn’t been on the IRS’ radar screen at all or for some long period of time.   So, we didn’t do much winnowing there.

On the other hand, with the remaining 144,980 of which the IRS was aware, perhaps it has cleaned up the sector a little, getting rid of those nonprofits that played fast and loose with the rules and regulations, or those that were ignorant, or those that were just too busy.  No matter what their excuse, they are gone—at least temporarily.  (The IRS has already started working with those organizations seeking reinstatement of their tax-exempt status.  Thus, this move may have turned into an annoyance, but not much more.  Unless this time round, the IRS will do a better job of keeping tabs and really enforcing what it, or the Pension Reform Act, says.)

So, what of those 145,000 of which the IRS was aware but are now no longer classified as tax-exempt?  Who are they?  According to Guidestar’s research, revenue for the largest 100 organizations on the revocation list had revenues ranging from $4-400 million. The largest three each reported income in excess of $2 million, the last time they reported (2004 or 2006); the top 50 each reported revenue in excess of $10 million.  These are not the small, grassroots, mom and pop nonprofits which might claim ignorance, or lack of resources or being too busy.  These are organizations that had the staff, access to knowledge and experts, and had senior management and boards that should have known better.   There are no excuses here.  There were, however, plenty of organizations that might be able to use the excuse of ignorance or lack of resources:  more than 75% of the now “de-frocked” nonprofits had annual revenues under $25,000.

And yet I wonder what were the folks running these organizations, regardless of their size, thinking?  More than half (57%) of these revoked organizations were 501(c)(3) public charities, meaning donations to these organizations were only tax deductible for their donors for as long as the nonprofit remained in good standing.  (Oops!  Blew that!)  Gaining tax-exempt status is a quid pro quo arrangement:  the government does something for you, you do something for it.  It may just be the one really clear thing in the IRS guidelines:  file the Form 990. How do you miss that?

But the question that really nags at me is “What good did this do the sector?”  Is the nonprofit sector better off as a result?  Are the stakeholders served by the sector better off as a result?  Or was this really just an act of “because we can” and consequence was not a matter of concern.  (Certainly the fact that the IRS is now working with nonprofits to get them reinstated suggests this may have been an exercise in power.)  Perhaps it was simply to allow us all to hear the lion roar in hopes that next time we all will jump to it.

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