by Robert I. Evans and Avrum D. Lapin
There are approximately 1.6 million non-profit organizations across the United States, encompassing nearly every kind of charitable cause. Almost a quarter of these non-profits organizations (NPOs) are religious or faith-based institutions, including many Jewish houses of worship and other types of organizations. Recently, however, the U.S. federal government reduced the number of NPO’s by about 15% when it identified 275,000 501c3 organizations on their books that appeared to be no longer in compliance with IRS reporting regulations. The action, as might be imagined, sent shock waves across the non-profit community and has attracted headlines in various publications addressing issues in the philanthropic sector.
Among the list of revoked NPO’s, there are at least 1,534 Jewish organizations, or 0.56% of the total. An EHL Consulting analysis this week identified several notable categories of groups that lost their status, including:
- Dozens of local chapters of B’nai B’rith and the Jewish War Veterans, including 151 B’nai B’rith chapters that registered using the organization’s Washington, D.C. headquarters’ address;
- Dozens of “American Friends” organizations for Israeli charities, including at least 109 in New York State, most of which were Yeshivot and other religious organizations based in Israel;
- Cemeteries and synagogue building trust funds, mostly in Southern and Western states;
- Obviously defunct organizations that never closed their IRS files, including United Jewish Appeal of Jersey City, Israel 50 in Pennsylvania, United Zionist Revisionists in Ohio and Synagogue Transformation and Renewal (STAR) in Minnesota;
- America-Israel Chambers of Commerce in several states;
- Several Jewish historical societies, Jewish “ethnic” organizations such as the United Jewish Lithuanian Organization of Los Angeles, and Jewish cultural organizations such as the Jewish Music Council in Wisconsin.
It appears that these organizations are either defunct or simply lack the staff resources to keep up with proper record keeping. Often these NPOs rely heavily on volunteers, who may have dropped the ball on filling out proper paperwork.
The registration and reporting requirements for non-profits – on federal, state and local levels – has become much more demanding in recent years, especially as the number of organizations seeking charitable support has grown and as philanthropy has become an ever-growing component of the U.S. economy. For decades, the Internal Revenue Service (IRS) has assumed responsibility for managing the information about non-profits that are campaigning across the United States. As a result, the registration and reporting process has matured markedly. Perhaps best known is the infamous IRS Form 990, which is a required bit of paperwork for almost every organization that seeks formal recognition as an NPO in the U.S.
The process of providing a tax-exemption essentially allows any NPO to forgo paying taxes on property, income or sales purchases. Secondly, non-profit status allows the organization’s donors to claim a tax deduction for their donations.
But when NPOs do not meet the federal requirements for tax exemption status by failing to file tax returns and other essential paperwork, they lose their status and put into jeopardy their selling proposition to donors with the loss of the ability to offer a tax deductible giving opportunity. That’s exactly what has happened to the 275,000 non-profit organizations as of June 8th. That is roughly 15-17% of all registered NPOs in the U.S.
After an unprecedented growth in the number of non-profits during the previous ten years, the IRS decided to review and ultimately purge its list of non-complying nonprofits, using the definitions and guidelines established in the Pension Protection Act passed in 2006 (PL109-280). Before this law, NPOs with revenues of $25,000 or less were not obligated to file basic IRS paperwork, such as Form 990, intended to make their operations more transparent. The new law lowered this threshold to $5,000.
The IRS gave three years’ due notice to organizations who had not filed necessary documents. There were warnings and outreach efforts to identify and inform negligent organizations. The IRS also alerted state associations, umbrella groups and the local media to maximize the outreach of the many potentially delinquent organizations. Most complied with the new law and the general consensus is that those who have not complied over the past three years are indeed defunct. Many people in the circles of non-profit management view the revocation of the 275,000 NPO’s as an admittedly draconian spring cleaning. And while most do not share the IRS’s ultimate agenda, it does serve a purpose by determining who is legitimate.
While it may not be surprising that so many organizations lost their status, considering that many organizations have never once filled out a tax form, there are fewer Jewish agencies on the list than expected. The Urban Institute’s National Center for Charitable Statistics reports that about 27,500 groups have filled a tax form at least once. The implications are that 90% of the other registered organizations have never reached the minimum budget threshold for filing tax forms or they are simply no longer in business.
These revocations could potentially have a great impact in the world of philanthropy, especially for legitimate, large organizations, which were, perhaps, simply negligent in their financial reporting to the IRS. Donors to those organizations will no longer be entitled to a tax deduction.
Fortunately, the IRS recognizes that a few compliant NPOs have, indeed, slipped through the cracks. In these cases, the IRS has a reinstatement policy. The cost will be between $100 – 850, depending on the NPO’s revenue; this reinstatement would require an organization to complete a Form 990-N or a VCP (Voluntary Compliance Program) form. The IRS announced that an updated list of revoked NPO’s will be posted on their website monthly. Their hope is that the list gets shorter each time.
Robert I. Evans, Managing Director, and Avrum D. Lapin, Director, are principals of The EHL Consulting Group, of suburban Philadelphia, and are frequent contributors to eJewishPhilanthropy.com. EHL Consulting works with dozens of nonprofits on fundraising, strategic planning, and non-profit business practices. Become a fan of The EHL Consulting Group on Facebook. Join Us on Twitter: EHLCONSULTGRP