Recent revelations of abuses of nonprofits, such as the infamous college admissions scam cloaked in the nonprofit Key Worldwide Foundation, have caused some people to ponder the integrity of the entire nonprofit sector. Abuses are the exception rather than the rule of the sector, but it made me wonder: Has the nonprofit sector become too big to monitor?
Current estimates put the number of registered nonprofits in the country at about 1.6 million, with a double-digit growth rate over the last dozen. One reason that we’ve seen the number of nonprofits increase stems from changes made by the Internal Revenue Service in 2014. The new streamlined application for charitable status for small organizations (gross receipts of $50,000 and less, which means most start-up nonprofits) transformed the original lengthy and detailed process into a much simpler form. This significantly reduced the time and dollars involved in applying for nonprofit status and cut the IRS approval time from at least a year to a matter of days. Estimates are that 95 percent of these applicants are approved after minimal review.
This form made it too easy to start a nonprofit. And subsequent lack of oversight after establishment allows any fraud or malfeasance to go unchecked.
Thus, the nonprofit sector has expanded with few, if any, controls. Nonprofit boards are charged with the legal and fiscal oversight of the organizations on which they serve, but board members often choose to remain in the dark or are easily manipulated by a strong executive.
Nonprofits deserve a rigorous and equitable screening process. Since neither the IRS nor states’ attorneys general have the capacity and/or interest to provide oversight to, or demand accountability from, this deluge of nonprofits, perhaps we should consider a three-year “learner’s permit” that would afford an opportunity for a nonprofit’s founder(s) to test their aptitude at running a nonprofit business successfully, during a period of more stringent scrutiny and consequences for violations. At the end of this period, a determination could then be made as to whether to grant permanent tax-exempt status.
While there are sometimes highly publicized cases of nonprofit leaders acting in bad faith, I believe, after spending my entire career working to strengthen and solidify the nonprofit sector, that the vast majority of organizations are dedicated to the betterment of society, and work to fulfill the good they promise when they first file their IRS paperwork.