Nonprofit Status for Everybody

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For people like me who love fireworks, early July is always exciting time. It seems no matter where you are, you don’t have to wait until the 4th to see the displays of color in the air and hear the bang and whistle of exploding fireworks. And this year, the IRS treated the nonprofit sector to its own special brand of fireworks.

It came on July 1 and it wasn’t blue and gold and shimmering and oh-so-wonderful in the sky, but rather fell more like a dud—only to cause its damage slowly over time. The target was our sector—everyone of us, big, small and everything in between, regardless of mission, age, geographic location, etc.; its impact will effect individual organizations and the collective of the sector. It had two parts:

• Part I: according to IRS Commissioner John Koskinen, as of  July 1, the IRS would stop screening about 80% of the applications for tax-exempt status. I had to read this several times, sure I was misunderstanding, not getting the real point. But the real point is this: 80% of organizations seeking tax exempt status would get their wish come true, no questions asked! It’s not that 80% are going to be rejected out of hand; 80% are going to be accepted simply because they comply.
• Part II: pay $400, fill out a three page, on-line form (that comes with 20 pages of instructions—just so the IRS is crystal clear in its directions), have annual income less than $50,000 and assets less than $250,000 (not a hard standard for the vast majority of start-ups to meet) and attest that you meet the expectations of the tax-exempt code and you are in like Flynn. Seriously! Forget the former 26 page application. (From one extreme to the next; no middle-ground, IRS?) Absent is the need for any verifying documentation.  And, most importantly, gone is the wait! But lie in your assertions that you comply with the regulations and you will face perjury charge. (With this new review process, who would find out if you lied?) So, yes, the IRS, in order to reduce its own on-going burden of reviewing all of these applications that come in each year (and clearing up the backlog of 66,000 applications), is making it easier than ever to get that coveted nonprofit, 501(c)(3) status. (And folks wonder how the NFL ever got nonprofit status. Must have been a really big logjam in 1920!) And increasing the troubles down the road, adding more heft to what I tell anyone who wants to start a nonprofit: it is easy (and now even easier) to start a nonprofit. The hard part is sustaining it.

Before all of you readers who have always wanted to start a nonprofit start salivating at the new ease of doing so, two things: reread the last sentence above. And second, consider the following.

At 1.6 million nonprofits in our sector, and having grown at a rate of 17% over the past 10 years or so (while the for-profit sector shrank), do we really need any more nonprofits? I have yet to hear of an idea in the last 20 years (at least) that some passionate, wanna-be founder has told me that a) isn’t already being done (but I get it, not by you), b) isn’t a variation on a theme, maybe with an interesting twist, of something already being done and/or c) would be best served, and clients would best be served, by being part of another organization, rather than an independent, one trick pony operation.

What our sector doesn’t need is more and that is exactly what these new regs will allow: any and every Thomasina, Denise and Harry who thinks s/he has a great idea can create a nonprofit. And all too few will understand what being a nonprofit entails and the ethical and best practice standards to which they should adhere. (Yesterday, we got a call from a woman wanting our help. When asked why “her” organization was a nonprofit, we were told because her accountant told her to become a nonprofit because she wasn’t making any money operating as a for-profit. Her board? Her, her husband and her daughter-in-law. She was shocked when we told her that wasn’t how it should be done! Do you think all of those self-certifying applicants will know any better?)

Second, with the process of anyone can become a nonprofit, our sector runs the risk of increasing future revelations of mismanaged and/or unscrupulous organizations, scam organizations and the like. Sadly, there’s no shortage of that already, but we don’t need any help with it either. While I agree with Commissioner Koskinen when he says that there is not a correlation between the amount of paperwork that needs to be completed and the degree of “nefarious” behavior that results, there is a correlation between scrutiny and nefarious behavior. If there weren’t, we would need to have a criminal justice system, regulatory agencies, even the IRS! So, why invite the possibilities of negative behavior into our sector when it puts the entire sector at risk? And there is a correlation between not understanding what you are getting yourself into and doing well, ethically and legally what you got yourself into. And, sadly, when one nonprofit is exposed as a screw-up, we are all seen as screw-ups.

Third, increasingly, funding dollars—from all sources—appear to be a zero sum pie.  Philanthropic dollars are not increasing at anywhere near the same pace as the numbers of nonprofits needing those dollars. Despite the growth of the sector, we have witnessed many nonprofits closing over the course of the last 10 years, many due to an inability to raise or earn sufficient dollars. We have also witnessed foundations folding, government and corporate giving shrinking and individual giving patterns shifting. The challenge of creating a sustainable business model for a nonprofit keeps getting tougher and tougher and earned income, be it mission related or not, is not a reasonable option addition or replacement for many organizations. Allowing more organizations to swim into this deep end of the pool without any scrutiny is dangerous for the whole sector.

Fourth, and, quite honestly, the part of this that I find most perplexing is the threshold of $50,000 in annual income. What’s that all about? While it is absolutely true that an organization can continue in some capacity ad nausea with less than $50,000 coming in annually, how many can really stay that small and do a superior—okay, even an average—job of fulfilling mission promises (which is what we are supposed to be all about)? Very few. My bet is that there isn’t a founder(s) of a start-up organization that applies for tax exempt status that thinks as s/he is completing the application, “Oh, if we can just never bring in more than $50,000 a year that will be so great! And that will make us a trustworthy organization and ensure that we are doing what the tax code says we should be doing.” What am I missing? Most of us are small when we start, but want to expand and become stronger.

I just don’t get it.  But then, I clearly don’t get anything that Commissioner Koskinen and his colleagues at the IRS were trying to accomplish with any of this—other than making life easier for the IRS. On the backs of the nonprofit sector.