Reporting on the recent revocation of tax status of 275,000 nonprofit organizations, the New York Times reported the action shrinks the nation’s nonprofit sector by roughly 17 percent, to about 1.3 million charities, trade associations, membership groups and labor unions. The IRS took action against charities that failed to file required paperwork for three consecutive years.
While it shrunk the number of nonprofits on the IRS’ list by 17 percent, it certainly did not reduce the number of nonprofits by 17 percent since most of the 275,000 organizations were apparently non-existent for many years. The IRS indicated about one-quarter of the 275,000 received tax exemptions before 1980 and many simply stopped operating without telling the IRS.
Until a change in federal law in 2006, only organizations with annual revenue of $25,000 or more — roughly one-third of the 1.6 million nonprofit groups — were required to file.
That law, the Pension Protection Act, required all organizations to file returns, but because it was embedded in 393 pages of a law that otherwise dealt with pension issues, many nonprofit groups did not know that.
This process is another example of legislation which, while well-intended, provided little benefit while creating an enormous amount of work—both for those in the government sector at taxpayer expense—and for charities, requiring perhaps millions of dollars of charitable contributions to fund the expenses of impacted charities.
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