Much Ado About Little

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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Giving to ECFA Members Exceeds National Trends

While the dominant headlines during the recession have focused on the decrease in giving to nonprofits, this is not the entire story.

We have just completed an analysis of giving to ECFA members. It revealed that for ECFA members renewing membership in the last six months there has been a net gain in giving of 2% from 2009 to 2010. Pre-recession giving compared to three years later was $6.18 billion in 2007 and $6.32 billion in 2010, or an increase of 3.3%.

It is very significant that this segment of the giving world was resilient and maintained itself during a difficult economic time. This suggests a strong commitment of givers to the Christian faith and the generosity of God’s people.

The recessionary impact on giving was more significantly felt by smaller charities. Organizations with annual revenue above $10 million reflected an increase in giving for the 2007-10 period of 3.1%. While the organizations under $10 million annual revenue saw a decrease of 3.2%.

Of the 552 member’s data studied, 43% reflected an increase in giving between 2009 and 2010, 44% showed a decrease and the data for 13% was about the same (plus or minus 2%).

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The Challenges of Charitable Solicitation Registration

There are few topics as confusing as state charitable solicitation registration. Nearly everyone who is in a charity leadership position is familiar with the concept but few clearly understand the implications of the laws in the various states as it relates to their charity.

One of the reasons this issue is so confusing is that it is a state, not a federal issue. With so much variation between the charitable solicitation laws in the 50 states, it is no wonder this matter leaves charity leaders puzzled.

Charities that seek contributions nationally must typically register in 39 states and the District of Columbia before starting to solicit. Since many states are increasing their enforcement efforts to ensure that charities and fundraisers are complying with initial and annual registration requirements, it's important that charities and fundraisers abide by these statutes—especially since noncompliance can result in the imposition of significant fines and penalties.

We have some excellent resources on the ECFA website to help you wade through the details of charitable solicitation registration including a state-by-state summary prepared by our friend and attorney, Chip Watkins.

To better understand these issues, join us for a special Charitable Solicitations Issues Webinar on June 22 at 1 pm EST. The two presenters, Karl Emerson and Dick Travis, are among the most knowledgeable individuals on this topic in the U.S. Karl is an attorney with Montgomery, McCracken and is the former director of the Bureau of Charitable Organizations of Pennsylvania. Dick Travis consults with many nonprofits on charitable solicitation issues and is the president of The Travis Group.

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