Muddled Misunderstandings Lead to Misguided Reforms

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Two sets of high-profile media stories involving extreme outliers – law enforcement taking action against individuals and sham groups that were masquerading as cancer “charities” to swindle $187 million from the public, and the one-of-a-kind Clinton Foundation founded by a former President and a current presidential candidate – have pundits wagging their fingers in scolding fashion at foundations and nonprofits. But muddled misunderstandings make for misguided reforms, as shown by David Callahan’s recent opinion piece.

That piece at various points uses the terms “nonprofits,” “charitable,” and “foundations” interchangeably, as if they mean the same thing. They don’t. The distinctions are important, because different laws and limitations apply. Such lack of accuracy about fundamental matters infects the entire piece. For instance, it calls for greater disclosure of who is making “charitable donations” to “groups that work to sway public policy.” If Callahan is concerned about the dark money being channeled through non-charitable nonprofits (such as 501(c)(4) social welfare organizations) to partisan political activities, many would agree. But he referenced “charitable donations,” which can be made only to 501(c)(3) charitable nonprofits that already are prohibited from engaging in partisan electioneering activities. So one can only conclude that he wants charitable nonprofits that engage in advocacy under the First Amendment to fill out even more paperwork for the government. He is certainly entitled to his opinion, but a unanimous U.S. Supreme Court ruled otherwise, in N. A. A. C. P. v. Alabama (1958) (a charitable nonprofit that was working to sway public policy in favor of civil rights did not have to disclose the names of its members, who contributed to it, to government officials in the South).

For those interested in fact-based solutions, here are four that would protect the public and legitimate charitable nonprofits from abusive behavior by nefarious individuals:

  1. Congress should apply the funds collected through the Foundation Excise Tax to their intended purpose. In 1969 Congress established a special tax on private foundations for the express purpose of covering “the cost of a more extensive and vigorous enforcement of tax laws relating to exempt organizations.” Yet Congress has never applied those tax receipts to their intended purpose; instead, it has sent them to the general account. In recent years, Congress has compounded that diversion by repeatedly cutting the IRS’ budget, which is now below the level in 2009 with about 10,000 fewer employees. If the IRS doesn’t have the resources to do its job, then responsibility for future scandals belongs to Congress for refusing to apply excise tax revenues as intended: to protect nonprofits, foundations, and the public from swindlers.
  2. Congress should stop the damage caused by the short-sighted rubber-stamping of all applications for charitable status. It’s important to recognize that Congress has so underfunded the IRS that the agency is no longer performing its most basic duties. Last year, in the face of significant budget cuts and close scrutiny of its growing backlog, the IRS ignored warnings from its own Advisory Committee on Taxation, the National Association of State Charity Officials, the National Council of Nonprofits, and others as it virtually eliminated its up-front screening of applications for charitable status. It did so by adopting both an expedited, rubber-stamp approval process on all applications for charitable status and a feeble application form (1023-EZ) for supposedly smaller groups. These steps effectively removed all safeguards needed to screen out bogus operators. The IRS has done “away with a review intended to counter fraud and prevent political and other noncharitable groups from misusing the tax code,” according to Time magazine. Now the IRS is handing out tax-exempt status like candy at Halloween. The situation is so bad that Nina Olsen, the National Taxpayer Advocate, observed that it is “making a mockery of the I.R.S.’s significant oversight function.”
  3. Legislatures should provide state charity officials with the resources necessary to perform their oversight roles. Our Public Policy Agenda has long called for state legislatures to provide “adequate funding for quality education, transparent oversight, and fair enforcement activities of state regulators charged with promoting nonprofit compliance and protecting the public.” Why? To keep fraudsters out of the sector and protect not only the donating public, but also the hundreds of thousands of nonprofits and foundations making a difference in their communities from having their reputations sullied by bad actors.
  4. Charitable nonprofits should continue training on accountability and transparency. Board and staff members of bona fide charitable nonprofit regularly look to “best practice” guidance, such as the Principles and Practices and Standards for Excellence® promoted by state associations of nonprofits, to ensure they are operating transparently and accountably.  Such efforts at self-regulation are an important part of any regulatory regime. But that alone will not drive out con artists from a sector, industry, or profession. That‘s why Congress needs to give the IRS the resources to do its job, and state legislatures need to invest in education, oversight, and enforcement for the nonprofit community.

The problem is not with the hundreds of thousands of nonprofits and foundations that serve their communities ethically every day. Nor is it a lack of government regulations. Rather, the real problem rests with lawmakers who set up regulatory systems but then fail to adequately fund them.  

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