Tuesday, August 2, 2022
George Washington Law Review just published Eric Amarante's article States as Laboratories for Charitable Compliance. The
abstract reads as follows:
Each year, the Internal Revenue Service (“IRS”) awards 501(c)(3), taxexempt status to thousands of organizations that do not meet the statutory requirements for charities. This is because the IRS, facing increasingly severe budget cuts, adopted a woefully inadequate application process that fails to identify even the most obvious of unworthy applicants. To illustrate this problem, this Article reviews the formation documents of 500 charities that received 501(c)(3) status in 2018 using this new application process. The results of this study are dramatic as they are upsetting: In Florida, only 41.11% of the charities in the study met the statutory requirements necessary for 501(c)(3) status. In Ohio, that number is 33.33%, meaning that two-thirds of the organizations using the new application process were incorrectly awarded 501(c)(3) status.
The worst performing state in the study, Idaho, boasted only 22.08% of organizations meeting the statutory test. As unworthy charities proliferate, the public may lose faith in the entire charitable regime. As trust dissipates, donations are likely to follow, and the charitable sector may lose a vital revenue stream. It is not an exaggeration to say that this potential loss of donations represents an existential threat to the entire charitable sector. With a change in budgetary priorities unlikely in the foreseeable future, it is unwise to wait for the IRS to curb this threat. Rather, it is prudent to identify another way to increase regulatory compliance in the charitable sector. This Article proposes a cost-efficient mechanism for states to fill the regulatory void
left by the IRS. To identify this mechanism, this study identified two states with procedures that resulted in high levels of regulatory compliance: Maryland and North Carolina. Approximately 94% of the organizations formed in Maryland met statutory requirements, while that number was 80.68% in North Carolina. By replicating the procedures in Maryland and North Carolina, other states will not only ensure higher levels of regulatory compliance, but also may help restore the public’s trust in the charitable sector.