Charities Rise, Costing U.S. Billions in Tax Breaks
The number of organizations that can offer their donors a tax break in the name of charity has grown more than 60 percent in the United States, to 1.1 million, in just a decade.
Experts say nonprofits are skillfully exploiting the tax code’s broad and elastic definition of what constitutes such a charity, making it difficult for the Internal Revenue Service, which must bless them, to say no. The agency approved 99 percent of the applications for public charity status last year, according to a new study by students at Stanford University — or more than one every 10 to 15 minutes.
Take the Woohoo Sistahs, a Social Club that won approval last year. Its 50 or so members meet regularly over drinks and dinner in the Hampton Roads area of Virginia and raise money for cancer research and other causes through walkathons and sales held in retailers’ parking lots.
What the Sistahs do is not so different from what the Shriners have done for decades to raise money for their hospitals — except that the Sistahs can offer their donors a tax break that the Shriners cannot because decades ago they registered as a different type of charity with the I.R.S. (Direct donation to Shriners hospitals are deductible.)
The $300 billion donated to charities last year cost the federal government more than $50 billion in lost tax revenue.
“Especially during these tough economic times, it’s troubling to hear we are increasing the number of these organizations at such a rapid pace,” said Representative Xavier Becerra, a California Democrat who is one of the few members of Congress to pay attention to the nonprofit sector.
“It’s not free,” Mr. Becerra said, “and so we need to do something to make sure taxpayers are getting a big enough benefit in return.”
Timothy Delaney, chief executive of the National Council of Nonprofits, agreed that the rapid increase in charities was an issue but said that addressing it would be extremely complicated.
“What are we going to do?” Mr. Delaney asked. “Have some bureaucrat establish a quota for arts organizations? Or after-school programs?”
Jacki Gerber, a member of the Woohoo Sistahs, said her group believed it needed to register as a public charity. “You can’t say the Woohoo Sistahs are going to have this big party and go around to corporate folks and ask for financial sponsorship and donated raffle items without becoming a 501(c)(3),” she said.
Last year, the I.R.S. approved such groups as a charity formed to ensure a “chemical free” graduation party at a high school in Monticello, Minn.; two donkey rescue organizations; and two new chapters of the Sisters of Perpetual Indulgence, a group of cross-dressing “nuns” who recently raised more than $25,000 for AIDS treatment and other causes with an event featuring a live S-and-M show.
Founders of new charities defend their value.
“There’s a real need for us,” said Ann Firestone, co-founder of Save Your Ass Long-Ear Rescue, a donkey and mule refuge in Vermont. “These days, people just can’t afford to keep these animals, and we take care of them until they find a new home. So I think we’re pretty worthwhile — though I can’t say that everyone who runs a nonprofit is.”
The tax code defines public charities as organizations that are “religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international amateur sports competition or prevention of cruelty to animals.” Almost any type of activity fits that definition, and most applicants seek that status because — unlike the more than 25 other categories of tax-exempt organizations — it allows their donors to take a tax deduction for their gifts.
Organizations in the other categories include groups like chambers of commerce, the National Rifle Association and private golf clubs. The I.R.S. received some 3,600 applications from those types of organizations last year, compared with more than 40,000 applications from those seeking designation as a public charity.
In most years, less than 5 percent of the applications for public charity status were turned down.
While no one contends that even a small portion of the new charities are fraudulent, critics argue that the I.R.S. and state regulators cannot keep up with the growth of charities — and therefore cannot possibly determine whether the applicants are adhering to state and federal regulations and laws.
Indeed, the students at Stanford found that while the I.R.S.’s electronic database records more than 40,000 new charities, its much more widely circulated annual Data Book puts the figure at more than 50,000, a discrepancy of more than 20 percent.
“It just seems utterly implausible that anyone can be doing due diligence in any way that constitutes a serious review of the applicant, let alone keeping an eye on them after they are approved,” said Rob Reich, an associate professor of political science at Stanford, whose students did the study on the growth of charities, titled “Anything Goes: Approval of Nonprofit Status by the I.R.S.”
“Why bother to have a review at all if you only reject 0.5 percent of the applicants?” he said.
Dean Zerbe, who in his former job as tax counsel to the Senate Finance Committee tried to curb expansion in the sector, shares that view. Mr. Zerbe says organizations seeking tax exemption should be urged to make sure they are not duplicating something others are already doing or to work through a charitable giving fund.
The I.R.S. sees things differently and is proud of its work toward streamlining the process of obtaining exemption as a public charity, which had been criticized by the agency’s own national taxpayer advocate, Nina E. Olson.
Lois G. Lerner, director of the I.R.S.’s exempt organizations division, said that when she came to the agency in 2001, “there was one approval process.”
“You submitted your application, it sat and sat on a shelf until someone was ready to take it up, and all the applications were worked in-depth, regardless of what kind of organization was seeking exemption,” she said.
“What we’ve learned,” Ms. Lerner added, “is that we don’t need to take the same kind of look at a large hospital and at a local soccer group.”
She said the agency had built scrutiny into its approval process. “We’re asking them questions and looking at things like whether they seem to be able to go forward as a compliant charity at the same time we’re educating them so they know what responsibilities they have if they’re approved,” she said.
Most new charities are more akin to the soccer group than the hospital.
The Red Nose Institute, a charity approved last year, needed donations to cover postage on the red clown noses it sends to American troops serving abroad. “We wanted to put smiles on their faces and relieve a little stress,” said Cheryl Herrington, a founder of the group and a psychiatric nurse who also works as a professional clown.
Ms. Herrington said the group considered working with established charities but “decided that we didn’t want to get lost in the shuffle of other groups.”
“We are pretty unique,” she said.
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Sources: NY Times, MSNBC, Huffington Post, Youtube, Google Maps
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