Religion and Education Groups Grew the Most

About 40 percent of the nation’s charities — or more than 300,000 organizations — gained tax-exempt status in just the past decade, a growth record that is unprecedented in recent American history. In comparison, during the previous 10 years fewer than 170,000 organizations were granted charity status by the Internal Revenue Service, a designation that allows their donors to receive a tax write-off.

The majority of those new groups are small organizations, often focused on local interests and operating with no paid employees. More than half, 53 percent, were not required to file federal informational tax returns, meaning they have annual revenue of $25,000 or less, or engage solely in religious activities.

Buddhist, Muslim Groups

It is in the area of religion where the growth among charities has been most concentrated. From 1999 to 2003, more than 35,000 nonprofit groups that focus on religious activities received charity status — more than one-fifth of all new charities registering with the IRS during that period.

While organizations that focus on Christianity accounted for the largest share (about half), more than 1,000 new Buddhist and Islamic charities were also created, nearly tripling the number that had previously existed. Nonprofit scholars attribute that increase, in part, to a growing Asian immigrant population in the United States that has its own set of needs.

People of Islamic backgrounds, they say, may be creating new Islamic charities because they have felt threatened in the years following the 2001 terrorist attacks and are uncomfortable seeking services from organizations that serve people of other faiths.

“It’s a population that for various reasons, especially after 9/11, has found more reasons to come together as communities,” says Rikki Abzug, an associate professor of nonprofit management in the Milano School of Management and Urban Policy at New School University, in New York. “This population has been under attack more in the United States, and may see the need to organize to give themselves a voice.”

Other areas of large growth include:

Education. Nearly 30,000 new groups were granted charity status from 1999 through 2004. More than half were either educational-support organizations, such as those that provide remedial reading services, parent and teacher groups, or adult-education programs, or organizations that provide scholarships and financial aid. The number of both types of groups more than doubled. Charter schools, which barely existed before 2000, were the fastest growing category of educational organizations — with 640 registered in 2003, compared with 11 in 1999.

Human services. About 24,000 charities were created. Organizations that assist specific types of people, such as the elderly, people with developmental disabilities, or the homeless, grew quickly, as did nonprofit groups that serve children.

Arts and culture. Nearly 20,000 arts and cultural groups became tax-exempt, of which about one-third were in the performing-arts category.

Geographic Spread

The Chronicle‘s analysis of new charities was carried out in conjunction with the National Center for Charitable Statistics, at the Urban Institute, in Washington, and was culled from two Internal Revenue Service databases.

One database included all charities on file with the IRS, while the other listed only those charities that file a federal informational tax return, or Form 990 — organizations with over $25,000 in revenue, excluding groups whose mission is solely religious.

Information about private foundations was excluded from the analysis.

The review showed that while nearly every part of the nonprofit world has grown significantly in recent years, the new groups have not sprouted evenly across the country. Instead, the largest numbers of new organizations have been set up in the urban centers where nonprofit groups traditionally have been located. Nearly 30,000 of the new charities created from 1999 through 2003 have headquarters in the nation’s seven largest metropolitan areas: New York, Los Angeles, Chicago, Washington, San Francisco, Philadelphia, and Boston.

However, the metropolitan areas with the largest percentage increases in new charities are all among the fastest-growing regions of the country, led by Atlanta, Las Vegas, Orlando, Houston, and Miami.

These findings jibe with research done by the New School’s Ms. Abzug. “Nonprofits are labor-intensive and dependent on public support,” she says. “It makes sense that wherever there are more people, there are more resources to fund this growth.” Large or growing metropolitan areas also tend to have the greatest needs for a nonprofit group’s services, she adds.

Following Government’s Moves

Nobody knows for sure why so many charities are being created, but nonprofit scholars point to big changes in government and society that could be playing a significant role.

“Many nonprofits may be responses to devolution by the federal government,” says Eugene Tempel, executive director of the Center on Philanthropy at Indiana University, in Indianapolis. The federal government, he says, “in an effort to reduce government spending, is devolving many of its roles and responsibilities to nonprofits, with the idea that local suppliers can provide similar quality services at lower cost.”

As a result, he adds, charities have received tens of millions more in federal funds over the past decade.

Peter Frumkin, an associate professor of public policy at Harvard University’s Hauser Center for Nonprofit Organizations, speculates that the growth of charities could be “a result of baby boomers’ progressive outlook on life.” In addition, he says, the increase could be a reflection of an expanding economy, through which more resources have become available to those interested in creating a new organization.

Diana Aviv, president of Independent Sector, a coalition of the nation’s largest charities and foundations, says the growth of charities also reflects a desire by cities and towns around the country to have their own set of organizations, ranging from museums to social-service groups. “There is a higher expectation of services on the part of individuals in our society,” she says.

Understating Gains

While it is clear that the number of organizations seeking charity status is exploding, some researchers say the precise number of new groups being created could be understated. That is because many organizations do not register with the Internal Revenue Service, even though they are required by law to do so. Studies in New York, Illinois, Indiana, and California have found that as many as half the charities in those states may not be registered with the IRS.

While many of those have annual revenue below $5,000 (the level at which groups are required to file with the IRS), researchers agree that a significant percentage should be registered.

“Some organizations do not understand that they need to be registered,” says Kirsten Grønbjerg, a professor at Indiana’s Center on Philanthropy who has conducted extensive research into organizations that do not register with the IRS. Others think that they have met all their legal responsibilities because they have filed official documents with a state or local government agency. Increased news coverage of nonprofit groups in recent years, however, is reducing the level of ignorance, she says.

“The greater visibility of nonprofits, through more news reports, has made people more likely to worry about, ‘Is our organization up to speed on what we need to do?’” Ms. Grønbjerg says.

Charity Closures

The problem of undercounting new groups is counterbalanced in part by the overcounting of organizations in operation today.

Charities that shut down are supposed to check a box on the last informational tax return that they file with the Internal Revenue Service, but many don’t bother to check it, and others check it even though they are still in business, thinking they should do so because it is the last form they will file that year.

“We’ve dismissed this last-return box as a meaningless way to track whether charities have ceased operating,” says Mark Hager, a senior research associate at the Center on Nonprofits and Philanthropy at the Urban Institute.

Nor does Mr. Hager believe it is safe to assume that a charity has gone out of business merely because it stopped filing the 990. Some stop filing because they don’t believe the IRS will catch them, and others do so out of laziness.

To better figure out how many charities are still operating, Mr. Hager made phone calls to groups over a two-and-a-half-year period that began just before the September 11, 2001, terrorist attacks.

He found that more than 4.5 percent of charities had closed, up from a rate of about 3 percent in an earlier study in the 1990s, an increase he attributed to the weak economy that followed September 11.

Categorizing Charities

Pinpointing which types of groups have seen the most growth is also an inexact science.

The Internal Revenue Service classifies each new charity according to a set of categories outlined in the National Taxonomy of Exempt Entities. That means revenue-service agents have to interpret what a charity says it will do, which is often not easy to discern from an application form.

What’s more, the IRS did not start systematically categorizing every organization until 1999.

More than 165,000 of the groups registered with the IRS have not been categorized — about 90 percent of which are among organizations created prior to 1995. The classification weaknesses make it difficult to be certain whether some types of groups are growing quickly or just appear to be because of a statistical glitch.

For instance, groups that provide financial support to other charities seem to be one of the fastest-growing types of charities, increasing by nearly 20,000 from 1999 to 2003. Such organizations are set up to raise money for a single organization, such as “friends of” organizations that support a public library or school. Others exist solely to raise funds and distribute them to a variety of charities.

While the IRS figures suggest that the number of such groups has grown fivefold, the figures could in large part be a reflection of the stepped-up coding of charities the tax agency previously left unclassified.

Some academic experts, however, think the growth in supporting organizations is real.

“This is a response to the ratings game,” says Patrick M. Rooney, director of research at Indiana’s Center on Philanthropy.

Over the past decade, Mr. Rooney says, a large number of watchdog groups have sprung up that rate charities based on, among other factors, the percentage of their revenue that is spent on fund raising.

By setting up separate supporting organizations, he says, charities “can load all their fund-raising costs on one organization and all their spending on the main charity, which gets high ratings because it looks very efficient.”

The growth in charities has some nonprofit researchers wondering whether the American economy can continue to support the nearly 800,000 organizations.

“That’s the million-dollar question,” says Mr. Rooney. Nonprofit organizations “have to compete with each other not only in providing services, but also in finding funding from private philanthropy.”

Ben Gose contributed to this article.