Thursday, May 15, 2014

Charities and the IRS - Who's to Say?

A while back a friend of mine announced proudly that the nonprofit he had helped launch had received its 501 (c) (3) designation from the Internal Revenue Service (IRS). This represents an achievement of patience and bureaucratic determination. To remind: 501 (c) (3) in the tax code exempts "charitable organizations" from having to pay (most) federal income tax and importantly to the organization, makes it eligible to receive tax deductible contributions.

Not to belittle my friend's accomplishment or his organization's worthy mission, but it would be a mistake for anyone to consider receipt of 501 (c) (3) status as the government's qualitative imprimatur. The IRS approves 99.5% of all exemption applications from charities. This fact, among other head-snappers, can be found in the book "With Charity for All" by Ken Stern (Doubleday 2013). Stern, the former head of National Public Radio, examines the role of charities in our society, the lack of accountability and meaningful evaluation of their effectiveness.

The governmental  definition of "charity" is very broad, as can be read in Stern's research. Included among those granted tax exemption by the IRS for their public service  (and  today there are 1.1 million individual charities in the country ) are the following: The All Colorado Beer Festival  ( self  defining ),  the Renegade Roller Girls (an Oregon female roller derby) and unforgettably, the Grand Canyon Sisters of Perpetual Indulgence  (promoting the drag queen lifestyle).  I am not making the latter up - you can "google"  it yourself.

With almost no attrition of 501 (c) (3) organizations,  except through abandonment, and some 50,000 new tax exempt charities added each year, a virtually unchecked system continues to roll on unabated. We are a democracy of course, and it could be said that this growth is evidence of vibrancy. There are consequences however.  One is the loss to the government of income. A congressional panel estimates that individual charitable donations will cost the Treasury Department $43.6 billion in foregone  revenue this year, according to Bloomberg Business Week. If you are a libertarian this might have appeal, but the loss of this  huge sum must has to affect some necessary governmental services.

Another consequence of the sheer number of tax exempts is confusion in the marketplace. The competition for donated dollars grows more intense. How do you choose? The  sheer glut of options  makes it harder for the donor to make distinctions.  Say you wanted to give to a charity that benefited U.S. Navy vets. You might have chosen the U.S. Navy Veterans Association- a good name, granted federal tax exemption and registered with  the Veterans Administration.

Oops. In 2010 the St. Petersburg Times revealed the charity was a fraud,  run by a con man who hijacked another's name. In the course of seven years "Bobby Thompson"  had bilked thousands of generous Americans of $100 million, not a dime of which ever found its way to a U.S. Navy veteran. Mr. Thompson - real name John Cody- began a 28 year jail sentence in 2013. After his arrest, authorities found among his belongings a suitcase stuffed with  $980,000 in cash .

Stories like that, and many more, to say nothing of the frequent revelations of internal embezzlement scandals (see my blog of  March 2012 "Ripping Off the Good Guys") collectively cloud the reputation of charities throughout the country. What is a good-hearted donor to do?  The IRS provides no oversight. There are several private organizations, such as Charity Navigator or GuideStar that, with online access, can provide basic screenings, but those concentrate largely on economic reporting standards. The matter of fiscal accountability is important but Mr. Stern believes there is another unresolved issue: how do you measure a charity's real effectiveness?

He details the efforts of a group of young financial investment analysts who, in 2006, wanting to donate but frustrated with lack of information about charities, banded together to develop a research evaluation model,   The result is an organization and website called GiveWell (www, that exhaustively digs deep into what certain charities do. The concentration is on those that work in developing nations, believing that donor dollars will go farther there. GiveWell each year  recommends charities that deserve support based on these criteria: data provided by the charity that is evidence-backed, proven cost effectiveness and that the charity is able to use increased funding effectively. The goal is to turn donors into investors.

When the group started they were frustrated by the response of some charities towards its request for data.  Some stonewalled, others relied on sending glossy brochures filled with what Stern calls "happy anecdotes and inspiring narrative." The thorough vetting process GiveWell has developed over the years is impressive, and can be seen in its website  (, It goes well beyond some of the metrics other evaluating groups use, such as ratio between overhead and programming costs. The transparency produced is designed so that people will have trust in where their dollars are going and what they are doing.

The IRS doesn't have the capacity to do such evaluation; some states' Attorney-Generals do, but usually after the fact of one scandal or another. Individuals should be asking hard questions of the organizations they are considering supporting,  and the organizations should work towards freely providing evidence-based data to demonstrate that what they are doing actually makes a difference.  We are largely a generous people and do not want to see any further erosion of belief in the value of nonprofits to our society.  We should expect then transparency and accountability from those very same nonprofits.

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