Watchdogs call for better transparency of nonprofits' IRS filings
Marcus S. Owens has observed troubling trends since stepping down as director of the Internal Revenue Service's exempt organizations division 14 years ago.
The nation's nonprofit sector is proliferating, just as resources available to federal and state oversight arms shrink or stagnate.
The IRS is shying away from public scrutiny, reeling from years of budget cuts and the aftermath of last year's scandal over the agency's selective audit of Tea Party groups.
And it's easier than ever for most applicants to secure tax-exempt status, through a shorter, self-certification process the IRS began in July to lighten its backlog.
All of that adds up to a warning from Owens.
“The agency's attitude toward tax-exempt (oversight) seems to be moving to one of, ‘It's not worth the hassle,' ” said Owens, who spent 25 years with the IRS before taking a job as a Washington attorney. “I think it's setting the stage for a real scandal down the road.”
The tenuous regulatory environment raises concern among other experts that it could become easier for bad actors to go undetected in a sector flush with hundreds of billions of dollars from donors and taxpayers. Charity Navigator ranked the Pittsburgh area fifth nationally this year in financial health.
The region's charities control $24.2 billion in assets and take in $16.6 billion in revenue, according to 2012 figures from the National Center for Charitable Statistics.
“There's not enough enforcement muscle at the IRS, and there's not enough at the state level,” said Chuck McLean, vice president of research for GuideStar, which publishes nonprofit tax data online. “It is my belief that there is very little intentional malfeasance, but it would not be difficult to get away with it, because there are not enough resources.”
Watchdogs, researchers and nonprofit advocates suggest a partial remedy to the enforcement dilemma: Mandate that all nonprofits file tax forms online, and release those public records in an open, searchable data format.
The IRS releases the forms only in an image file, making it difficult to search for words and figures or identify aggregate trends without painstakingly key-punching information found on millions of pages.
Advocates say the procedural change could bring meaningful transparency and self-policing to the tax-exempt sector, which accounts for more than 10 percent of non-government jobs and $532.1 billion in wages.
“At the end of the day, it's not about nonprofits doing anything wrong,” said Rick Cohen, spokesman for the National Council of Nonprofits. “It's about a person committing fraud against a nonprofit, and the people in the community who aren't being served because those dollars were being diverted.”
About half of nonprofits choose to file tax forms electronically, but the IRS takes a snapshot of those files before releasing them. That destroys the searchable metadata, said Carl Malamud, an open records advocate in Northern California who is suing the IRS to obtain nine tax returns in the format the nonprofits used for online submission.
“We're shooting ourselves in the foot by not releasing the e-file data,” said Malamud, who founded Public.Resource.Org and was responsible for getting Securities and Exchange Commission data online in the 1990s. “It's really stupid.”
Can't keep up
The proposed e-filing change has the backing of President Obama, who included the provision in his 2014 and 2015 budgets, and wide bipartisan support in Congress, aides say. It was folded into stalled comprehensive tax reform legislation.
“This is a common-sense proposal with no opposition that we know of, that is just not moving forward due to gridlock,” said Cinthia Schuman Ottinger, deputy director of philanthropy programs for the Washington-based Aspen Institute.
Aside from catching abuse, researchers say, the release would enable the sector to develop useful applications, pinpoint effective consultants and identify causes threatened by higher rates of insolvency.
The number of American nonprofits filing annual returns nearly doubled in the past decade, up to nearly 1.1 million in 2013, IRS data show.
Meanwhile, the IRS lost the equivalent of more than 12,000 full-time positions and nearly $1 billion. In 2013, the IRS examined 0.71 percent of charitable organizations, down from 0.81 percent in 2011 and lower than rates for individuals (1 percent) and corporations (1.4 percent), the Government Accountability Office wrote in a report this month.
“To be fair, the IRS has gotten their budget cut over and over and over again,” Malamud said. “On the other hand, this is pretty simple to do.”
Support for e-filing
As e-filing becomes more common, fewer people are expressing concern that such a mandate would be too onerous for nonprofits. Even the IRS indicated in writing its support for upgrading its technological processes, though agency officials say they don't have the capacity to do so.
Tamera Ripperda, the director of exempt organizations for the IRS, declined multiple requests for an interview.
“There may be short-term investments, but it would be miniscule in comparison to the amount of time we save and the stewardship of the sector,” said Kate Dewey, president of the Forbes Funds, a supporting organization of The Pittsburgh Foundation.
The National Association of State Charity Officials lauds mandatory e-filing as a way to help root out fraud. Investigators could, for example, instantly pull up a query on every nonprofit that gave a CEO a loan and examine why, or more easily spot questionable connections such as an executive concealing pay across several nonprofits.
Pennsylvania's attorney general has an investigative section focused on nonprofits, but the unit's 25-employee team typically is swamped by 1,800 to 2,000 cases a year involving disputes over estates, wills and trusts, leaving enough time and resources to handle about 100 open cases involving suspicious solicitation, said Mark Pacella, who oversees the Charitable Trusts and Organizations Section.
“We rely on boards of directors to be our first line of defense, and we hope donors will make smart decisions,” Pacella said.
GuideStar.org posts 990 forms online free to users with accounts, but the forms are in non-searchable PDF files and tend to be about two years behind.
The IRS charges individuals $2,300 to obtain a CD or DVD with a complete set of 990s filed monthly between 2008 and 2014, or $100 for a set of returns filed quarterly in a particular state.
Each month, Malamud gets a box of 30 to 40 of those DVDs shipped to his office in Sebastopol, Calif. He fires up a row of DVD burners and begins the 48-hour process of translating the information into more user-friendly formats. He has compiled 7.9 million filings dating to 2002 — but would rather not play that middleman role. He wants searchable forms accessible to everyone from GuideStar to Google to the average citizen.
Malamud is scheduled to return to U.S. District Court on Jan. 14, when his attorneys and the IRS will make oral arguments. The judge could issue a summary judgment.
“Normally, there's great deference to the government when the government says, ‘This would be very hard to do,' ” Malamud said, “but I think we've poked a lot of holes in their arguments, and I am very hopeful we're going to win.”
Natasha Lindstrom is a Trib Total Media staff writer. Reach her at 412-380-8514 or email@example.com.