The Independent Sector’s governance panel issued its report last week to much applause. The report was well written and made many of the right noises about conflicts of interest policies, audits, and other vital internal controls. Yet, anyone who delves deeply into this report will see...
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one major flaw, which is the result of the “big-tent” approach which
was to used to maximize “buy in” from members of the sector.
Specifically, the report repeatedly seeks to let small non-profits off
the hook. Consider the following comments scattered throughout the
Panel's report:
Recommendations must consider the limited resources available to small organizations. Page 18
8. Demonstrations of Compliance with High Standards of Ethical Conduct Should be Commensurate with the Size, Scale, and Resources of the Organization. All organizations should be expected to operate ethically and serve as worthy stewards of the public and private resources entrusted to them. Fraud or abuse cannot be condoned in any organization for any reason, since each breach of the public trust damages the reputation of the entire sector. At the same time, it may not be possible or desirable for small organizations, given their limited human, technical, and financial resources, to demonstrate their ethical and accountable operation by complying with some of the more complex legal requirements appropriate for larger charitable organizations. Lawmakers must consider the varying situations of organizations to which regulations may apply, andmust refrain from adopting regulations where the costs of demonstrating compliance outweigh the benefits gained. Page 22.
The Panel is studying with the intent to recommend further statutory changes that may be required to eliminate particular information requirements that increase the cost and difficulty of implementing electronic filing requirements for charitable organizations with substantial investment holdings. Regulations should also permit exceptions for smaller organizations that do not have easy or affordable access to the necessary computer hardware or software for electronic filing. Footnote 2, Page 26.
Some statutory changes may be required to eliminate particular information requirements which increase the cost and difficulty of implementing electronic filing for large organizations without serving a clear enforcement purpose and to provide appropriate accommodation for smaller organizations that do not have easy or affordable access to the necessary computer hardware or software for electronic filing. Page 30.
In making revisions to the Forms, the IRS should consider the impact of changes on smaller charities and foundations so as not to impose undue burdens on them. Page 31.
These comments inappropriately lend support to those people who frequently submit questions to non-profit listservs which often read something like this:
Hi. I am with a small social services agencies. On our budget, we can’t afford elaborate financial controls. We receive a lot of cash. What is the secret for making sure the cash isn’t stolen before we get it to the bank? What can we do?
There isn’t a secret. Cash is a problem for all organizations in terms of financial controls. The fact that your organization is small is irrelevant.
When some people from smaller non-profits are told that they need controls just like everyone else, they respond as follows:
We really care about our clients. Anything we spend on internal controls is just that much less that we can provide to our clients.
Well, if you feel that way about administrative costs, just collect the money, put it in a bag, and let your clients help themselves. In other words, spending money on teachers and counselors is just as wasteful as spending it on accountants because those in need could just take what they need if the money were left at the doorstep of the agency.
We hope we have made our point. Big or small, all organizations must account for and protect their assets. Both their benefactors and their clients are entitled to this. The Independent Sector Panel does the non-profit community a great disservice by propagating the myth that small non-profits should be less accountable. In fact, the Independent Sector Panel is out of step with other governance experts.
Consider the recent report from the IRS’s Advisory Committee on Tax Exempt and Governmental Entities (ACT), June 8, 2005, in which this group made the following recommendation:
2) Lower the Form 990 filing threshold to $5,000. Require charities, not otherwise exempt from the Form 990 filing requirement and having gross receipts between $5,000 and $25,000, to complete and submit a modified version of the top section of Form 990-EZ. The ACT recommends that the Secretary of the Treasury rescind the discretionary exemption for charities with gross receipts normally below $25,000 and reinstate the $5,000 statutory filing threshold. In order to minimize the administrative burden on small charities, organizations with gross receipts normally between $5,000 and $25,000 would be required to submit only basic identifying information (name, EIN, address, website address, e-mail address, primary and secondary contact information, certification that gross receipts remain below $25,000, and, where applicable, notice of termination.
Background. To relieve administrative burdens on small charities, the $5,000 statutory threshold for filing Form 990 under section 6033(a)(2)(A)(ii) was increased to its current level of $25,000 under the discretionary authority of the Secretary of the Treasury. An unintended consequence of this discretionary exemption for the Form 990 filing requirement has been that EO has lost contact with a significant percentage of small charities in the years following recognition of exemption. The 1994 Exempt Organizations’ Nonfiler Study estimated that 14% of the nonfilers (below the $25,000 threshold) had terminated their activities, and another 7% could not be located by IRS agents even after exhaustive searches. Imposing a modified annual filing requirement on virtually all charities would enable EO to update the EOBMF with current contact information and permit deletion of terminated organizations. In addition, this modified annual filing requirement would require most organizations to file Form 990 from the outset, thus increasing the likelihood that small organizations will comply with their full Form 990 filing obligations when they reach the $25,000
threshold.
At the heart of this recommendation is the fact that when small organizations are excused from compliance there are unintended consequences—in this case, the IRS loses track of them. Like all of us, when these organizations are faced with a compliance requirement, they must act. That alone makes them think about the issues they should be thinking about.
Last week, the National Taxpayer Advocate, Nina Olson, seconded ACT’s recommendation in an interview with Tax Analysts. She, too, pushed for lower filing thresholds so that smaller organizations don’t slip through the cracks. She also suggested that smaller charities be encouraged to merge/consolidate.
In this week’s Chrisitian Science Montior, asked the same question: Do we have too many charities? See, Hall, Too Many Ways to Divide Donations? (June 20, 2005). Mr. Hall offered the following examples where communities may have too many choices:
For example, people looking to support education in Des Moines, Iowa, have 330 nonprofits to choose from, according to a search of nonprofit databases. San Francisco givers who want to help the city's homeless have more than 125 possibilities. Portland, Maine, has more than 450 charities that help children.
In our view, the Independent Sector Panel should have demanded the same level of compliance from small non-profits as it does from big ones. Cost should not be a factor. If a non-profit can't finance quality governance, the answer is merger or consolidation, not exceptions to the baseline requirements. You can expect to see more demands for consolidation in the future.
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