How Do We Fix Nonprofits?

Nonprofits have recently been immersed in scandal. FIFA’s managerial elite has been exposed after decades of legendary corruption.  Last month, the U.S. government charged four American cancer charities with misusing over $187 million in donations. The American Red Cross is facing tough questions about how it has failed to get relief materials to those who needed it in the aftermath of disasters, such as Hurricane Sandy, despite publicly raising vast sums of money. Are nonprofits morally bankrupt? Is donated money simply going to crooks? Well, nonprofits may be going through a rough patch in the spotlight, but that’s how the system is supposed to work.

High-profile nonprofits in the United States are often held to a higher ethical standard than for-profit entities. Nonprofits have to publicize comprehensive financial records in order to maintain their tax-exempt status with the IRS, something for-profit organizations don’t have to do. These records are collected privately by multiple sites and put in databases for potential donors to look at before entrusting organizations with their money; the material is also directly and easily available from the IRS itself. The pressure of being under this kind of constant public scrutiny recently caused the NFL to voluntarily change from a nonprofit to a for-profit corporation. This move allows the NFL to keep more finance materials private in the face of public outcry over how money was being spent. Where unethical spending is more likely to arise and go un-noticed is in smaller non-profits and those nonprofits flying quietly under the radar, collecting large sums while facing little public scrutiny.

American Red Cross volunteers providing assistance in New Orleans, Louisiana

These blind areas are in large part due to a lack of resources, and policy choices, at the IRS. The IRS has come under fire lately for letting many applications for charitable status go through without proper vetting. This phenomenon is due to a lack of funding, insufficient staff, and increased pressure to expedite the process after a procedural bottleneck caused a one and half year waiting period for applicants in past years. The form for applying for exempt status is currently two and a half pages as opposed to the previous 23 pages application. Applicants now don’t even have to state the purpose of their organization when applying.

Additionally, once granted tax-exempt status, the IRS does not require filings from charities that expend less than $50,000 a year.  Even those who file annual returns don’t always provide sufficient accounting for where their money went, but the IRS simply doesn’t have the resources to investigate thoroughly all of the filings sent in. A problem the IRS has with for-profit entities as well after budget cuts for five years have left them weak at the knees.

Thus, the best legal fix for unethical nonprofits then would seem to be a better funded IRS. A better funded IRS would report more problem organizations to the authorities, as well as report problem organizations more quickly. However, this solution doesn’t seem to be coming anytime soon. In the meantime, it will largely be up to private individuals and organizations to notify the public when nonprofits are behaving badly; donor beware.

*Austin Thompson is a second year law student at Wake Forest University. He holds a Bachelor in Business Administration with a concentration in Economics and a minor in History from Mercer University in Macon, Georgia.