September 30, 2004 | Read Time: 7 minutes
Long before television shows such as CSI and Crossing Jordan made forensic science part of the popular culture, Jack Klugman starred as a medical coroner in a show called Quincy. His character was never satisfied to simply cut up bodies and solemnly pronounce the cause of death. Instead, he got involved with the investigations, which often led him to exclaim, in sheer frustration, “There ought to be a law. …”
Over the past few months, the public and, perhaps more important, members of Congress have echoed Dr. Quincy’s frustration with their own anger at the abuses discovered in major nonprofit organizations, such as the excessive compensation the New York Stock Exchange awarded its chairman, the proliferation of tax-shelter schemes involving nonprofit groups, and the lack of oversight by nonprofit trustees.
The cry from Congress and some watchdog organizations is that the way to curb abuses is to pass a sweeping overhaul of nonprofit law, including new rules to regulate compensation, regular reviews of whether a charity deserves to keep its tax-exempt status, and licensing and training requirements for board members.
While many abuses persist in the nonprofit world, from outright embezzlement to wildly exploitative transactions between insiders and their organizations, new laws and regulations are not what is needed.
Not only does the Internal Revenue Service already have broad authority to audit and enforce laws that govern tax-exempt groups, but in most states the attorneys general have widespread powers over nonprofit groups, including powers to preclude them from fund raising, replace the boards of directors, and bring criminal charges where appropriate.
That does not mean that the laws and regulations, both federal and state, that are on the books today are perfect. They can and should be adjusted in some cases. For instance, the disclosure requirements on the annual tax returns filed by charities should be stepped up and loopholes that allow charities to offer abusive tax shelters need to be closed. But, for the most part, plenty of legal prohibitions are already in place that would curb wrongdoing, and are simply not being enforced adequately.
Among the new approaches that have been proposed in recent months: Aides to the Senate Finance Committee have suggested that the IRS regularly evaluate whether a nonprofit group is effective and revoke the tax-exempt status of groups that don’t pass the test. As many critics have argued, that is not only impractical, but also unfeasible. As it is, the tax-exempt unit of the IRS (like all parts of the IRS) is so badly underfinanced that only a tiny portion of tax-exempt groups receive any scrutiny. Requiring the IRS to scrutinize the conduct of every nonprofit organization to determine whether each one continues to deserve its tax-exempt status would be an enormous and costly undertaking.
More important, however, unless a charity is abusing its tax-exempt status, that is not an area in which government should intrude. In the first instance, how best to measure success? Is a cancer charity unsuccessful because cancer hasn’t yet been eradicated? Is an arts organization unsuccessful because it has staged just one show in five years due to fund-raising problems and the audience for the one show was small? Should a social-services group lose its tax-exempt status because it only provided services to a fraction of the people whom it thought, at the time that it sought charity status, it could serve?
The appropriate judges of whether those organizations are successes or failures ultimately are its donors. Intelligent, well-informed donors who have the appropriate information at their disposal will make judgments as to whether their money can be better spent.
Just as in the business world, the market will determine the ultimate successes and failures in the nonprofit world. Governments should do all they can to promote disclosure by tax-exempt groups about their activities and finances so that donors, through the power of their wallets, can decide whether a nonprofit group should keep operating.
Congress should also avoid any effort to put the IRS into the charity-accreditation business. The question of accrediting nonprofit groups, or requiring training for board members, is most appropriately left to state governments. State laws already set the rules for corporate or trust governance, and it would probably make the most sense that if laws requiring accreditation or training are ultimately enacted, they should be approved at the state level. The states are in a better position to police organizations operating within their borders than requiring the IRS to set up, in effect, 50 state offices dedicated to such hands-on supervision of nonprofit groups.
To be sure, the federal government has a role in monitoring how well nonprofit groups do their work, especially when it directly finances their operations. But that isn’t the bailiwick of the IRS. It makes far more sense for the Department of Housing and Urban Development, or a state housing agency, to set and enforce performance criteria for organizations that receive government financing to provide low-cost housing, for instance, than it would to have the IRS take over that duty.
Making sure board members are accountable is just as important in stamping out abuse as setting charity performance standards. However, it is the states that should impose requirements, just as they do now to guarantee that lawyers, doctors, and others have the qualifications to serve in their roles and that such professionals are obtaining the continuing education they need to keep serving the public as well as possible.
While most of the tools already exist for the federal and state governments to crack down on charities, they lack something just as important as enforcement authority: money. To say the least, ridiculously small sums are available to hire the necessary personnel to enforce the laws and regulations currently on the books. For example, the Charities Bureau of the New York State Attorney General’s Office has a total of 19 lawyers in New York City and another 5 in Albany.
That means 24 people are supposed to police the 49,000 charities and other nonprofit groups that have registered in New York, plus countless others that have not registered. Can anyone really argue that passing more complicated laws requiring further oversight by these already overworked professionals will lead to healthier, less-corrupt nonprofit organizations?
Additional regulations could be especially difficult for small organizations, because the new complexity could deter people from serving as trustees or staff members of small organizations. Or, as is often the case with organizations too small to afford knowledgeable counsel, some groups might decide to disregard the law entirely. Small organizations often have difficulty getting board members who will even attend board meetings, much less actively participate, in the management of their organizations.
Inexperienced board members and officers often violate laws out of ignorance, not out of bad intentions.
A client of mine who knew nothing about her legal obligations as a nonprofit official said to me with fear, “I don’t want to be the next Martha Stewart.” And this was from a person who neither took a dime from the organization that she and her husband had formed nor enjoyed any perks.
Overregulation of the nonprofit world will be counterproductive, as it will not eliminate the truly larcenous or sleazy. Instead, it may discourage those who are genuinely dedicated to making a difference in society through small, grass-roots organizations.
As governments consider the best ways to curb abuses, they need to keep the regulations simple. Concerted and consistent enforcement of existing laws is what is needed to wash the sleaze out of the nonprofit world.
Michael S. Kutzin, a New York lawyer, is also an adjunct faculty member of the George H. Heyman Jr. Center for Philanthropy and Fundraising at New York University.
