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The New Form 990: Tough Love in Philanthropy

By Tom Watson on June 20, 2007No Comment

Tough Love

The New Form 990: Tough Love in Philanthropy
By: Susan Raymond, 6/20/2007

The announcement of a new and improved Internal Revenue Service tax form for nonprofits is a good thing for the nonprofit and philanthropic sectors.  A really good thing.

For several years now, this author has observed that the nonprofit sector in this country exists at the pleasure of the people.  It represents a social compact in which the people agree to bear the tax burden of nonprofit organizations in exchange for their commitment to dedicate themselves to problems on the societal commons which individual citizens cannot singularly address.  As with any social compact, that relationship is rooted in trust.  When trust erodes, so does the strength of the agreement – in this case, the willingness of the people to continue to bear the burden.  The possibility of that erosion is not trivial.  In many communities, 25% or more of property is off the tax rolls due to nonprofit ownership, which means that property owners must make up the difference. {Please see previous column on the subject.} Transparency can counteract distrust and prevent that erosion.

The action of the IRS comes none too soon.  The nonprofit sector is no longer simply an agglomeration of “mom and pop” social efforts with citizens stuffing envelopes around Aunt Tillie’s kitchen table.  Nonprofits spend nearly $800 billion annually, and account for 8.5% of national income.  The nonprofit sector is the third largest contributor to the U.S. GDP, after retail and wholesale trade.  One in every ten jobs is in the nonprofit sector, and nonprofits represent as much as 38% of employment in some major cities.  The sector presents to the people not simply the face of local community, but, increasingly, the face of big business.  Trust, in turn, faces a raised public eyebrow.

Combine sheer size with complexity and that eyebrow can rise to the public’s scalp line.  Three decades ago, nonprofits received a third of their income from private voluntary contributions.  Today, that has fallen to 23%.  In turn, income from programs has risen to 72% of total revenue, compared to 60% three decades ago.  Indeed, some sectors are no longer nonprofit at all; 83% of ambulatory health care in America is provided in proprietary organizations.  Nonprofit income from unrelated business revenue has tripled in the last 15 years.

So the sector is becoming larger and more economically visible as its revenue structure evolves to reflect its business structure.  Public trust — the willingness to pay those extra taxes — requires clarity of purpose and transparency of financial structure.  The degree to which that trust is at risk is disturbingly well-documented by Anne Glauber in her essay We the People:  Public Trust and Expectations  recently published in Mapping the New World of American Philanthropy: Causes and Consequences of the Transfer of Wealth edited by this author and Mary Beth Martin.  Americans are skeptical about the honesty of nonprofits, and the older Americans get, the more skeptical they become.  This slide toward distrust can (and must) be stopped with the kind of transparency that the new Form 990 requires.

True, it will take more effort on the part of nonprofits.  Many nonprofits do not shy from that effort and look forward eagerly to clearer guidance from the IRS and to the ability to step forward with greater transparency.  Some nonprofits, however, will think it annoying; some have already said as much.  I would side with the former.  To those who view these changes with annoyance or plan grudging compliance, I would respond very simply.  Public trust is not owed, it is earned.  Tax exemption is not simply a legal or regulatory status, it is a civic privilege.  Effort is not too much to ask in exchange for privilege.

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