June 26, 2011 | Read Time: 6 minutes
Washington
The nonprofit world is now 14 percent smaller, the result of an Internal Revenue Service effort to withdraw tax-exempt status from groups that have not filed the necessary paperwork.
The tax agency believes most of the more than 275,000 organizations no longer on the rolls are defunct, but some groups have said that they are very much alive—so it may be unclear for a while just how many groups really exist. The list of groups that have lost their tax-exempt status does show that more than 63 percent were charities and about 10 percent were civic leagues and social-welfare organizations.
The rest were other tax-exempt organizations such as social and recreational clubs, business leagues, labor and agricultural organizations, and fraternal beneficiary societies.
Many on the list were relatively new groups, a sign perhaps that the explosive growth of nonprofits in the past two decades was unsustainable, especially as the economy was starting to weaken. About 24 percent of the groups that lost their status were registered from 2000 to 2007, and another 24 percent were created in the 1990s, according to a forthcoming analysis by the National Center for Charitable Statistics at the Urban Institute.
Rob Reich, co-director of the Stanford Center of Philanthropy and Civil Society at Stanford University, said that in the past 20 years, 135 nonprofits started every day, “so it shouldn’t be surprising that many of them are, after a few years, invisible and non-operating,”
Nonprofits, he said “are usually created by well-intentioned people with interesting ideas about how to pursue some type of social benefit, but good intentions don’t always translate into longevity.”
The findings also reinforce the low barrier for entry to become a nonprofit; the IRS annually approves 80 to 99 percent of applicants for tax-exempt status.
“The bar has always been low because we’ve wanted to provide maximum opportunity to help people. It’s very easy to get running as a nonprofit,” said Paul Light, a professor at NYU’s Wagner School of Public Service. “There’s also a bias in the funding community toward newness. If it’s old, it can’t be good. That viewpoint leads to the enthusiasm and startup of a lot of nonprofits.”
But Mr. Light says many more nonprofits have probably closed than the official list suggests. “The recession has taken down some nonprofits, and that will show up in future revocations,” Mr. Light said. “There’s been an overall hollowing out of the sector with layoffs and downsizing.”
‘Best Use’ of IRS Time?
The IRS took its action in 2006 after Congress, which was concerned that the tax agency wasn’t doing enough to crack down on nonprofit abuses, ordered it to get rid of any group that had not filed required paperwork for three consecutive years.
Nonprofit experts say the housecleaning will help charity leaders, local governments, and scholars better understand how tax-exempt groups operate.
“We’ve known for a long time that many were probably not alive, but we didn’t have a way to go in and find out until now,” said Elizabeth Boris, the director of the Urban Institute’s Center on Nonprofits and Philanthropy. “If we’re projecting what’s happening to the sector and you have this unknown quantity that seems to be there and yet really doesn’t exist, it messes up your ability to project and see the sector’s scope.”
But Leslie Lenkowsky, a professor of public affairs and philanthropic studies at Indiana University, wonders if the IRS’s effort to trim its list really does reflect the reality of the nonprofit world. His university’s own surveys show that the number of actual nonprofits in the United States is about 40 percent greater than what the IRS reports. Many groups are run by volunteers and have donors who don’t care about tax deductions, so they simply don’t bother registering with the IRS.
“It doesn’t tell us much, only that the IRS is being diligent in its bookkeeping. Whether the benefits of that diligence exceed the cost is a different matter,” said Mr. Lenkowsky, who is also a Chronicle columnist. “You wonder that given that there may be real problems in some big nonprofit organizations, whether chasing after these small ones is the best use of limited IRS enforcement time.”
A Changing Social Fabric
While the list of organizations that lost their tax-exempt status is full of new groups, it also has many organizations that may have reached the peak of their popularity decades ago.
For example, more than 1,800 groups on the IRS list were part of the fraternal organization the Knights of Columbus. Other frequently occurring names were for the American Legion and the American Legion Auxiliary, the International Association of Lions Clubs, and the Free & Accepted Masons. Robert Putnam, a Harvard University professor and author of Bowling Alone: The Collapse and Revival of American Community, said these results reinforce his theory that the personal ties that link people to society and one another have deteriorated. Mr. Putnam encourages nonprofits to take the lead in rebuilding these connections.
“We know from individual data that membership in such organizations has been plummeting for 30 years. And we know from anecdotal data that local fraternal clubs all over America have been shutting down, as their membership aged,” Mr. Putnam said in an e-mail. “This is a new source of evidence confirming that basic trend.”
But the large number of fraternal groups on the list doesn’t mean that social connections are on the decline, Mr. Lenkowsky says.
Many of them were affiliates of large national groups that perhaps thought that their headquarters’ office would handle the paperwork, Mr. Lenkowsky said. And while some of these groups are shrinking, others are thriving.
“There’s no question that they have declining memberships, but that doesn’t mean that there aren’t replacements springing up,” Mr. Lenkowsky said. “People may be bowling alone, but they’re also playing soccer together. Soccer leagues have grown.”
Staying Vigilant
Many of the Knights of Columbus affiliates that lost tax-exempt status were probably inactive groups, said Patrick Korten, a spokesman.
What’s more, some councils have merged, while some active groups simply failed to file their paperwork on time.
Veterans groups such as the American Legion had nearly 1,600 posts lose tax exemptions. The American Legion Auxiliary, which represents women, also lost 1,000 groups. Philip Onderdonk, an American Legion spokesman, acknowledged that many local groups were inactive but said that the Legion is working to reinstate any group that wrongly lost tax-exempt status.
If anything, the IRS action is a call to all nonprofits, old and new, to be vigilant about keeping up with state and federal paperwork rules, said Jeffrey Tenenbaum, a nonprofit lawyer in Washington who advises many nonprofits.
“Small groups are run by volunteers with lots of turnover, and it’s challenging to keep everyone educated,” Mr. Tenenbaum said. “But as we’ve seen, if you don’t do it, you can lose your tax-exemption.”
