February 17, 2005 | Read Time: 3 minutes
As Congress and others step up their scrutiny of charities, many lawmakers, watchdog groups, academic researchers, and others are disappointed that the Internal Revenue Service has decided not to set up a database that will make it easy for the public to gather data in the informational tax returns that nonprofit groups file online.
When the IRS announced last month that over the next two years it will gradually start requiring large groups to file their returns via the Internet, many scholars and others had hoped that the files would be turned into a computer database of financial information that would be easier to analyze than the paper and electronically scanned images of the tax returns now available.
“Having publicly available data is the key,” said Linda Lampkin, program director at the Urban Institute’s National Center for Charitable Statistics. “A database will allow a much more systematic look at things. People who watch the sector need it. People who manage in the sector need it.”
With the current system, Ms. Lampkin said, anyone interested in using computer software to analyze the financial activity at a range of nonprofit groups must first enter the data into the computer by hand from hundreds or even thousands of individual tax returns. That, she said, is a time-consuming and expensive enterprise and increases the chances that errors will be introduced. If the IRS made a database of electronically filed tax returns available, however, that would facilitate such research, she said.
Confidential Information
Midori Morgan Gaide, manager of the Electronic Initiatives Office in the IRS Exempt Organizations division, said the IRS would be putting charity returns into its central tax-return database “along with all the other taxpayer data.” Because the nonprofit groups’ data will be mixed with the returns filed by individuals and businesses, they will not be easily, if at all, accessible. The IRS is required to keep that kind of taxpayer information out of public hands.
Sen. Charles E. Grassley, the Iowa Republican who chairs the Senate Finance Committee, said in a written statement that he was disappointed by the decision not to create a separate database that would be available to the public. He said that while he was “pleased the IRS is working to encourage electronic filing,” more needs to be done to ensure “the IRS makes the tax information it receives easily and readily available to the public.”
Noting that current rules require just those groups with $10-million or more in assets to file returns electronically, IRS officials left open the possibility of creating a publicly accessible database if a large percentage of organizations take advantage of free software and other incentives to file their returns online. But researchers argued that it makes more sense to set up such a database soon.
“It’s a whole lot easier to start a database than it is to recreate it retroactively,” said Patrick Rooney, director of research at Indiana University’s Center on Philanthropy. “Why not do this from the get-go?”
One big reason is money. The IRS would have to give additional funds to its Exempt Organizations division to pay for software and programming to create the new database.
Mr. Rooney said that even though a relatively small percentage of charities will be required to file electronically by 2007, those will include many big charities. “Right now the top 1 percent of nonprofits comprise two-fifths of the total assets,” he said. “It’s where a lot of the jobs are. It’s where a lot of the net worth in the nonprofit sector is. It’s where a lot of the revenues flow in and out.”
The need for a database “is really a no-brainer,” he said. “They could do this at a very low cost, and it would have a very high benefit.”
That is also the conclusion of a group of nonprofit officials and experts on tax-exempt groups that is working on a detailed report to submit to the Senate Finance Committee, which is considering new regulations on charity. In a draft version of the report, the group says, “Congress should provide financial support for a publicly accessible database.”
