Any feedback about the weaknesses of my paper would be very helpful, Thank you.
Nonprofits for Good
Today's 24-hour news cycle is deeply integrated into modern society. Web browsers inundate users with headline topics. A political message interrupts a podcast. A social media site has a targeted algorithm that is designed to provoke the user. This targeted messaging is used to push one side of an argument. Often described as "dirty laundry," such information intends to damage the credibility of their target. Associations with nonprofit groups have become a common focal point when debating a public figure or organization's character. The truth is that many nonprofits do good things, and those associated with them have integrity. Unfortunately, some bad actors have found ways to use nonprofits as vehicles for financial gain and political jockeying. The growing number of nonprofits and their shared importance within the framework of society have created a need for more transparency. Nonprofit organizations' funding, spending, and mission activities need to be publicly accessible to preserve trust, reduce opportunities for fraud, and support an informed democratic society.
Nonprofit or charitable organizations are woven throughout the fabric of democratic societies. These organizations predate the founding of the United States and were set up as fire departments, hospitals, and orphanages (Arnsberger et al. 105). A charitable organization in the basic sense can be set up by anyone or any group with the mission of helping without the motivation of profit. If, in the process of performing their mission, an organization intends to raise funds, offer goods or services for sale, or have paid employees, they will need to register with the IRS. An organization wishing to be tax-exempt must be operated under section 501(c) code of the Internal Revenue Code (IRS.gov). There are 27 distinct sections of the 501(c) code, listed as 501(c)(1) through 501(c)(27) (Arnsberger et al. 123). 501(c)(3) organizations make up what are commonly referred to as charitable organizations or nonprofits. Section 501(c)(3) can be segmented into three distinct categories: charitable nonprofits, private foundations, and churches and religious organizations (Nonprofitimpactmatters.org). The data related to the actual number of nonprofit organizations is not exactly clear because of the different filing sections. The most accurate counts can be given as a representation of the tax form 990 filing, which shows that as of 2022 there were 1.97 million active nonprofits operating in the United States and 1.48 million of those were 501(c)(3) charitable organizations (USAFacts).
Like the concept of charitable organizations itself, tax-exemption has an extensive history of legislation. The earliest statutory reference to tax-exemption for certain organizations came from the Tariff Act of 1894 (Arnsberger et al. 106). The tax code for nonprofits has been amended frequently over the years to remain in parallel with revised accounting standards. Also, the code needs to stay relevant to the changes in the social atmosphere. The Pension Protection Act of 2004 required 501(c)(3) organizations to make their form 990-T available for public inspection (Arnsberger et al. 106). Form 990 details the information needed by the treasury department to validate an organization's nonprofit status (IRS.gov). This information on this form has also been amended over the years; however, it can be complicated to decipher and easy to manipulate.
The information on a Form 990 is public information and can be found on multiple sources. Like individual tax returns, there are levels of information required based on the fiscal size of the organization. A small organization with less than $50,000 in gross receipts can file a 990-N, while larger organizations must file 990-EZ (irs.gov). The depth of the information found on Form 990 is standardized and covers an organization's assets and expenses as well as their mission. The form does not include the needed detailed information that all stakeholders need to know. In a recent press release the Treasury Department stated, " Recent congressional oversight has raised concerns that some fiscal sponsorship arrangements may be used to obscure who is operating a project, who controls project funds, and how those funds are being used" (Treasury). All these concerns can be conveniently misleading on the required filings. Scott Bessent, the Treasury Secretary went on the say:
"Public money and tax-exempt status demand public accountability."[ And that] "We are ending the days of hiding fraud, abuse, and extremist activity behind complicated nonprofit arrangements. When bad actors misuse charitable structures, directors and officers should understand that transparency can lead to scrutiny, accountability, and liability under the law" (Treasury).
What the secretary is saying is that there has been misuse by nonprofit institutions in the past, and there continues to be misuse today. The United Way is a worldwide charitable organization with the mission of helping communities overcome challenges. Often, the United Way will find themselves in the news in the wake of a disaster such as a hurricane. In 2002, United Way found their way into the news in a very different way. A financial scandal involving the CEO stealing money resulted in donations falling from $93 million to $35 million (Bottiglieri et al.). Had the compensation data for the CEO been made public on required filing prior to this event, the embezzlement wouldn't have been able to occur to begin with, and the resulting loss of donations would not have happened. With truly transparent accounting there would have been no way to hide the money trail.
A more modern example of an organization using creative bookkeeping is the now dissolved Trump Foundation. New York's Attorney General, Latisha James, found that the Trump foundation had been using its charitable donations for political gains (James). Part of the 501(c)(3) code makes clear that the organization, "may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates (IRS.gov). The Trump Foundation had to have charges brought upon it by a State Attorney General, followed by a lengthy trial to uncover the misuse of the tax-exempt status of the foundation. Having firmer legislation forcing public transparency of the use of funds by a nonprofit would have eliminated the need for a trial and the airing of dirty laundry. An attempt was made to use a nonprofit to enhance a candidate and in turn created a blemish on the campaign. This lawsuit may prove to be a win for nonprofit legislation by proving that no one is above the law and reducing the likelihood of another campaign attempting this in the future.
Not every nonprofit in the news is there because of a scandal. Highly contested topics such as abortion and DEI (diversity equity and inclusion) are used as fuel for political grandstanding. Planned Parenthood is a nonprofit organization that makes the news at most every election cycle. The mission stated by Planned Parenthood is, "to protect and expand access to sexual and reproductive healthcare and education, and provides support to its member affiliates" (Planned Parenthood). Whether for or against the mission of Planned Parenthood, if an association can be made between them and a candidate, it will be brought up in the campaign. Associations, or claims thereof, with ANTIFA, HRC (Human Rights Campaign), or even the ACLU (American Civil Liberties Union) will all be brought into the open during an election cycle. If nonprofit regulations required more publicly transparent and precise information about where its funding came from and contained open endorsements of candidates, it would eliminate the out-of-context information being fed to voters.
Positive consequences for nonprofit accountability are not only for the public stakeholders. The nonprofits themselves will benefit from changes to the filing regulations. Having a public forum from which to showcase the advancements of the mission of an organization demands greater accountability than a private website. A holler from the rooftops attitude can be used by a nonprofit to show that their donors align with their values and the values of their constituents. Shelagh Gastrow, an expert in philanthropy, explains that "20 years ago many non-profit organisations seeking some ethical basis relating to their donors cause may well have decided, for example, not to accept funds from tobacco or alcohol companies if they were dealing with children, while others refused funds from gambling or weapons manufacture" (Gastrow). Additionally, she explains how social media has made a "minefield" of what money is from a clean donor (Gastrow). Given the opportunity, the nonprofit would be able to take the social media aspect out of the equation and refer to the 990 filings. Metaphorically, they could point at the scoreboard without an argument.
Nonprofits in the United States are ultimately guided by the policies of the Treasury Department. The Treasury, like any other department of the government, needs to pass legislation to effect changes to their policies. As stated previously, reform has been actively happening since the first mention of tax-exemption on1894. The Sarbanes-Oxley Act of 2002 was passed to protect stakeholders of a corporation by preventing deceptive accounting practices. This act was created with publicly traded for-profit corporations in mind. The act, however, contained two articles that had direct implications for nonprofits. The act contains a Whistleblower policy, which imposes criminal liability for retaliation against whistleblowers (Payne. 67). A whistleblower is someone who has knowledge of wrongdoing and alerts the proper authorities. Like a referee will blow the whistle to stop play during game to call a penalty. Often corruption is easier to hide from outsiders, so these whistleblowers are an important part of keeping organizations accountable. Also, within the Sarbanes-Oxley Act is the document retention and destruction policy. This policy forbids the purging of any documentation when an organization is under federal investigation, making it punishable by law (Payne. 68). This policy carries over to nonprofits as well and negates the destruction of a paper trail should a concern be brought about the credibility of a nonprofit.
Sarbanes-Oxley has other components that need to be part of transparent nonprofit regulations. The Act requires a corporation to have independent accounting audits performed cyclically by an outside firm. Ethical accounting is taken very seriously in the profession, and peer review keeps everyone honest. Along with the benefits of peer review, there are benefits for the regulating authorities. The vast number of employees the IRS would need to hire to perform the duties accomplished by the peer review would be staggering. The same process should be used for nonprofit accounting. A risk assessment performed at the time of the original nonprofit filing would segment the organizations into peer groups based on size. Thes groups would in turn be responsible for performing cyclical audits of the others. Reducing waste at the government level to positively impact the quality of nonprofits is a win-win for everyone.
Affecting changes in the magnitude that Sarbanes-Oxley did can take a long time. Unfortunately, the necessity of that change was fueled by the destruction of the pensions of so many hardworking people. Nonprofit reform doesn't need to be the result of a disastrous situation. The Treasury Department can start right away by giving the nonprofits the forum to show who and what they stand for. A limited number per year would be allowed to submit their complete information which will be fact checked by an oversight committee. A fiscally responsible department would ask those who submit an application to pay an entrance fee to cover the compensation for the oversight committee. That application will also require the organization to sponsor the application of a lesser funded nonprofit organization.
Altruistic governance is the spirit of charitable organizations. There is no governing body that can accomplish true transparency through regulation without the assistance of peer supervision. Nonprofits are being used as weapons in this information age and leading to a misinformed society. James Madison was clear about this when he said; "A popular government, without popular information, or the means of acquiring it, is but a Prologue to a Farce or a Tragedy; or, perhaps both" (Madison). He was right and without reform requiring nonprofits to share all relevant information available to the public, they will continue to be possible hiding places for deceptive practices. The good charitable organizations who have proven their character deserve to thrive and grow. The people who want to help by sharing their time, money, and expertise with these organizations deserve to thrive and grow along with them.
Works Cited
Nonprofits for Good
Today's 24-hour news cycle is deeply integrated into modern society. Web browsers inundate users with headline topics. A political message interrupts a podcast. A social media site has a targeted algorithm that is designed to provoke the user. This targeted messaging is used to push one side of an argument. Often described as "dirty laundry," such information intends to damage the credibility of their target. Associations with nonprofit groups have become a common focal point when debating a public figure or organization's character. The truth is that many nonprofits do good things, and those associated with them have integrity. Unfortunately, some bad actors have found ways to use nonprofits as vehicles for financial gain and political jockeying. The growing number of nonprofits and their shared importance within the framework of society have created a need for more transparency. Nonprofit organizations' funding, spending, and mission activities need to be publicly accessible to preserve trust, reduce opportunities for fraud, and support an informed democratic society.
Nonprofit or charitable organizations are woven throughout the fabric of democratic societies. These organizations predate the founding of the United States and were set up as fire departments, hospitals, and orphanages (Arnsberger et al. 105). A charitable organization in the basic sense can be set up by anyone or any group with the mission of helping without the motivation of profit. If, in the process of performing their mission, an organization intends to raise funds, offer goods or services for sale, or have paid employees, they will need to register with the IRS. An organization wishing to be tax-exempt must be operated under section 501(c) code of the Internal Revenue Code (IRS.gov). There are 27 distinct sections of the 501(c) code, listed as 501(c)(1) through 501(c)(27) (Arnsberger et al. 123). 501(c)(3) organizations make up what are commonly referred to as charitable organizations or nonprofits. Section 501(c)(3) can be segmented into three distinct categories: charitable nonprofits, private foundations, and churches and religious organizations (Nonprofitimpactmatters.org). The data related to the actual number of nonprofit organizations is not exactly clear because of the different filing sections. The most accurate counts can be given as a representation of the tax form 990 filing, which shows that as of 2022 there were 1.97 million active nonprofits operating in the United States and 1.48 million of those were 501(c)(3) charitable organizations (USAFacts).
Like the concept of charitable organizations itself, tax-exemption has an extensive history of legislation. The earliest statutory reference to tax-exemption for certain organizations came from the Tariff Act of 1894 (Arnsberger et al. 106). The tax code for nonprofits has been amended frequently over the years to remain in parallel with revised accounting standards. Also, the code needs to stay relevant to the changes in the social atmosphere. The Pension Protection Act of 2004 required 501(c)(3) organizations to make their form 990-T available for public inspection (Arnsberger et al. 106). Form 990 details the information needed by the treasury department to validate an organization's nonprofit status (IRS.gov). This information on this form has also been amended over the years; however, it can be complicated to decipher and easy to manipulate.
The information on a Form 990 is public information and can be found on multiple sources. Like individual tax returns, there are levels of information required based on the fiscal size of the organization. A small organization with less than $50,000 in gross receipts can file a 990-N, while larger organizations must file 990-EZ (irs.gov). The depth of the information found on Form 990 is standardized and covers an organization's assets and expenses as well as their mission. The form does not include the needed detailed information that all stakeholders need to know. In a recent press release the Treasury Department stated, " Recent congressional oversight has raised concerns that some fiscal sponsorship arrangements may be used to obscure who is operating a project, who controls project funds, and how those funds are being used" (Treasury). All these concerns can be conveniently misleading on the required filings. Scott Bessent, the Treasury Secretary went on the say:
"Public money and tax-exempt status demand public accountability."[ And that] "We are ending the days of hiding fraud, abuse, and extremist activity behind complicated nonprofit arrangements. When bad actors misuse charitable structures, directors and officers should understand that transparency can lead to scrutiny, accountability, and liability under the law" (Treasury).
What the secretary is saying is that there has been misuse by nonprofit institutions in the past, and there continues to be misuse today. The United Way is a worldwide charitable organization with the mission of helping communities overcome challenges. Often, the United Way will find themselves in the news in the wake of a disaster such as a hurricane. In 2002, United Way found their way into the news in a very different way. A financial scandal involving the CEO stealing money resulted in donations falling from $93 million to $35 million (Bottiglieri et al.). Had the compensation data for the CEO been made public on required filing prior to this event, the embezzlement wouldn't have been able to occur to begin with, and the resulting loss of donations would not have happened. With truly transparent accounting there would have been no way to hide the money trail.
A more modern example of an organization using creative bookkeeping is the now dissolved Trump Foundation. New York's Attorney General, Latisha James, found that the Trump foundation had been using its charitable donations for political gains (James). Part of the 501(c)(3) code makes clear that the organization, "may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates (IRS.gov). The Trump Foundation had to have charges brought upon it by a State Attorney General, followed by a lengthy trial to uncover the misuse of the tax-exempt status of the foundation. Having firmer legislation forcing public transparency of the use of funds by a nonprofit would have eliminated the need for a trial and the airing of dirty laundry. An attempt was made to use a nonprofit to enhance a candidate and in turn created a blemish on the campaign. This lawsuit may prove to be a win for nonprofit legislation by proving that no one is above the law and reducing the likelihood of another campaign attempting this in the future.
Not every nonprofit in the news is there because of a scandal. Highly contested topics such as abortion and DEI (diversity equity and inclusion) are used as fuel for political grandstanding. Planned Parenthood is a nonprofit organization that makes the news at most every election cycle. The mission stated by Planned Parenthood is, "to protect and expand access to sexual and reproductive healthcare and education, and provides support to its member affiliates" (Planned Parenthood). Whether for or against the mission of Planned Parenthood, if an association can be made between them and a candidate, it will be brought up in the campaign. Associations, or claims thereof, with ANTIFA, HRC (Human Rights Campaign), or even the ACLU (American Civil Liberties Union) will all be brought into the open during an election cycle. If nonprofit regulations required more publicly transparent and precise information about where its funding came from and contained open endorsements of candidates, it would eliminate the out-of-context information being fed to voters.
Positive consequences for nonprofit accountability are not only for the public stakeholders. The nonprofits themselves will benefit from changes to the filing regulations. Having a public forum from which to showcase the advancements of the mission of an organization demands greater accountability than a private website. A holler from the rooftops attitude can be used by a nonprofit to show that their donors align with their values and the values of their constituents. Shelagh Gastrow, an expert in philanthropy, explains that "20 years ago many non-profit organisations seeking some ethical basis relating to their donors cause may well have decided, for example, not to accept funds from tobacco or alcohol companies if they were dealing with children, while others refused funds from gambling or weapons manufacture" (Gastrow). Additionally, she explains how social media has made a "minefield" of what money is from a clean donor (Gastrow). Given the opportunity, the nonprofit would be able to take the social media aspect out of the equation and refer to the 990 filings. Metaphorically, they could point at the scoreboard without an argument.
Nonprofits in the United States are ultimately guided by the policies of the Treasury Department. The Treasury, like any other department of the government, needs to pass legislation to effect changes to their policies. As stated previously, reform has been actively happening since the first mention of tax-exemption on1894. The Sarbanes-Oxley Act of 2002 was passed to protect stakeholders of a corporation by preventing deceptive accounting practices. This act was created with publicly traded for-profit corporations in mind. The act, however, contained two articles that had direct implications for nonprofits. The act contains a Whistleblower policy, which imposes criminal liability for retaliation against whistleblowers (Payne. 67). A whistleblower is someone who has knowledge of wrongdoing and alerts the proper authorities. Like a referee will blow the whistle to stop play during game to call a penalty. Often corruption is easier to hide from outsiders, so these whistleblowers are an important part of keeping organizations accountable. Also, within the Sarbanes-Oxley Act is the document retention and destruction policy. This policy forbids the purging of any documentation when an organization is under federal investigation, making it punishable by law (Payne. 68). This policy carries over to nonprofits as well and negates the destruction of a paper trail should a concern be brought about the credibility of a nonprofit.
Sarbanes-Oxley has other components that need to be part of transparent nonprofit regulations. The Act requires a corporation to have independent accounting audits performed cyclically by an outside firm. Ethical accounting is taken very seriously in the profession, and peer review keeps everyone honest. Along with the benefits of peer review, there are benefits for the regulating authorities. The vast number of employees the IRS would need to hire to perform the duties accomplished by the peer review would be staggering. The same process should be used for nonprofit accounting. A risk assessment performed at the time of the original nonprofit filing would segment the organizations into peer groups based on size. Thes groups would in turn be responsible for performing cyclical audits of the others. Reducing waste at the government level to positively impact the quality of nonprofits is a win-win for everyone.
Affecting changes in the magnitude that Sarbanes-Oxley did can take a long time. Unfortunately, the necessity of that change was fueled by the destruction of the pensions of so many hardworking people. Nonprofit reform doesn't need to be the result of a disastrous situation. The Treasury Department can start right away by giving the nonprofits the forum to show who and what they stand for. A limited number per year would be allowed to submit their complete information which will be fact checked by an oversight committee. A fiscally responsible department would ask those who submit an application to pay an entrance fee to cover the compensation for the oversight committee. That application will also require the organization to sponsor the application of a lesser funded nonprofit organization.
Altruistic governance is the spirit of charitable organizations. There is no governing body that can accomplish true transparency through regulation without the assistance of peer supervision. Nonprofits are being used as weapons in this information age and leading to a misinformed society. James Madison was clear about this when he said; "A popular government, without popular information, or the means of acquiring it, is but a Prologue to a Farce or a Tragedy; or, perhaps both" (Madison). He was right and without reform requiring nonprofits to share all relevant information available to the public, they will continue to be possible hiding places for deceptive practices. The good charitable organizations who have proven their character deserve to thrive and grow. The people who want to help by sharing their time, money, and expertise with these organizations deserve to thrive and grow along with them.
Works Cited
