An article in Sunday’s Washington Post addresses the impending collision between a quickly expanding field of inadequately vetted nonprofits and a rapidly shrinking capacity at the IRS for monitoring them. Responsibility for the expansion falls to the new 1023-EZ application and its apparent low threshold standards for approval. The shrinking capacity of the exempt organizations (EO) unit of the IRS can be attributed to budgetary retribution for the scandal that followed reports that the IRS was delaying applications for conservative groups seeking nonprofit tax-exempt status.
Specifically, the article reports that the budget of the EO division has dropped from $102 million in 2011 to $82 million last year, and its staff numbers have been reduced from 889 to 642. NPQ has also observed the “brain drain” at the agency, which began before the scandal and continues as many experienced managers either retire or seek employment in less stressful and more financial rewarding environments. Meanwhile, in 2014, its first year, the new 1023-EZ form designed for new 501c3 groups with small budgets, which requires no supporting documentation, drew 100,000 new applications for tax exemptions; last year, the division rejected just 37 of the 79,582 applications on which it made a final determination.
A study by the Taxpayer Advocate Service at the IRS later found that more than a third of the groups surveyed were not qualified to use the EZ form and should not have been approved. The advocate service said there was “a disturbing lack of information” about the new groups, which threatened to undermine “the public’s and the IRS’s ability to effectively monitor this segment of the exempt organization population.”
To be fair, the IRS was never particularly active in its policing of the sector, and it has recently been increasingly bolstered by many state charity offices and the FTC as in the Cancer Charities case, but this combination of trends in and around the IRS should cause anyone who cares about the credibility of nonprofits more than a little concern. Experts agree there is little chance for a nonprofit to lose their tax exemption or even get sanctioned by the IRS for any cause other than neglecting to file the required Form 990 for three years in a row.
But what the Post does not mention is that even as the IRS exempt organization unit is struggling, there are forces at play that seek to reorganize the federal capacity to hold nonprofits accountable, so the IRS may not be bowing out so much as reorganizing:
- Most of the data available to the IRS through the Form 990 are now very accessible to the press and other public stakeholders. Reporters’ increasing use of such resources in high-profile media investigations sometimes spark state or local and even congressional inquiries and enforcement efforts.
- In many states, state charity offices, which are often under the offices of the attorneys general, are becoming more active, doing their own investigations and taking action alone and together to close organizations and encourage criminal and civil pursuit of offending parties—the recent shutdown of VietNow being one prominent example.
- Finally, although the IRS exempt organizations office was perhaps always ill-suited for investigations and enforcement, it is not proposing to step out of the role completely, declaring it will be moving to an algorithm-based system for identifying malefactors.
It is clearly in the best interests of this sector for nonprofit stakeholders to believe that tax-exempt organizations are held to basic standards of practice and accountability set out in existing law and regulation. Leaving the press to control accountability and public perceptions through the use of media exposés, though this clearly must be a part of any accountability system, risks the confidence of the American public. Perhaps one of the next campaigns in which nonprofits should involve ourselves is ensuring that the system for holding nonprofits accountable is what it ought to be. It looks like we may need to do so, in fact, since GOP House Ways and Means Chairman Kevin Brady has declared his intention in 2018 to see the Internal Revenue Service overhauled, an effort for which he believes he could get bipartisan support.