President Donald Trump recently signed an executive order that he said would keep his campaign promise to defend religious groups from the IRS when they engage in political speech.
Like other experts, I believe this move does nothing to change IRS policy. But as a law professor who used to litigate exempt-organization tax issues for the Internal Revenue Service, I’m concerned the news might suggest that charities are over-regulated.
In fact, the opposite is true.
The Johnson Amendment
During the campaign, Trump often trumpeted a false claim that churches were under attack by the IRS due to the Johnson Amendment, a 63-year-old law that bars all charities from engaging in political activities.
Soon after he took office, Trump swore he would destroy it. However, his recent order merely directed the IRS to keep up its already light regulation of religious groups.
Trump couldn’t defang the Johnson Amendment if he tried because the IRS rarely punishes any nonprofit organizations, including churches, for violating it. While the IRS has admonished churches that may have violated the amendment inadvertently, the IRS has revoked a church’s tax-exempt status for violating the Johnson Amendment only once since it became law. In that instance, a Binghamton, New York church published newspaper ads urging Christians to vote against Bill Clinton in 1992.
In other words, the Johnson Amendment is mostly toothless.
One problem with the fuss Trump made over the law: It fostered the impression that churches are being oppressed by the IRS, when in reality the federal government does not employ enough regulators to properly oversee the nonprofit sector – including religious and secular groups.
In 2000, the IRS had about 800 employees dedicated to reviewing applications and auditing tax-exempt nonprofit organizations. In 2013 it had 842. Staffing appears to have actually shrunk since the 1970s, when the Treasury Department undertook a thorough study of the charitable sector and its oversight environment, known as the Commission on Private Philanthropy and Public Needs. That commission counted 1,000 employees dedicated to this function.
While the agency’s staffing has declined, the number of charities registered with the IRS has soared to more than 1.2 million in 2016, from around 320,000 in 1980. The real number is higher because churches automatically qualify for tax-exempt status without doing any paperwork. That means the nation’s estimated 350,000 religious congregations don’t need to register with the IRS or file tax returns – a fact at odds with Trump’s over-regulation myth.
The National Taxpayer Advocate, an independent office within the IRS that represents taxpayer voices, since 2012 has regularly described the IRS as severely lacking the resources needed to oversee the charitable sector.
Theoretically, the federal government does not need to heavily regulate charities because state attorneys general typically bear the responsibility for providing this oversight.
In reality, the states don’t employ the staff or spend the money required to oversee nonprofits either. According to a survey conducted by University of Minnesota Law School Dean Garry Jenkins 10 years ago, most states employed no more than the equivalent of a single full-time staffer to do this work.
Even New York state’s team of more than 20 full-time employees, the largest Jenkins found, was still arguably unable to keep up with its workload. Given the economic stress the states are experiencing, there’s no reason to believe that this situation has improved over the past decade.
While the IRS has rarely found significant noncompliance among charitable organizations, reports of rogue charities are common enough to suggest that the nation needs stronger nonprofit oversight.
The Red Cross is still struggling to quell concerns from Congress about its accounting practices in Haiti after the group raised $500 million to response to that country’s 2010 earthquake. In 2013, the Center for Investigative Reporting and the Tampa Bay Times zeroed in on 50 charities that spent as little as three cents on the dollar they raised for charitable activity on work tied to their missions.
And in 2016, the Federal Trade Commission (FTC), all 50 states and the District of Columbia settled with the Cancer Fund of America Inc., Cancer Support Services Inc. and the leader of both groups, James Reynolds Sr., barring them all from operating in the charitable world again. The FTC alleged that they spent most of their money on families, friends and operators rather than on charity.
Were the charitable sector small, the limited oversight resources might not matter much. However, nonprofits today account for almost 5 percent of GDP and employ roughly 1 in 10 American workers.
An independent agency
Perhaps surprisingly, research by the IRS and reviewed by Notre Dame University law professor Lloyd Hitoshi Mayer suggests that noncompliance isn’t widespread. But enough wrongdoing has surfaced that several legal scholars, including Mayer and Catholic University professor Roger Colinvaux, have called for significantly stronger nonprofit oversight.
Texas A&M law professor Terri Lynn Helge has reviewed various ideas for boosting oversight, such as creating state boards to oversee charities or allowing a charity’s big donors and founders to sue over perceived malfeasance. However, no state has significantly tightened its oversight.
Helge supports the creation of an independent self-regulating entity technically backed by federal agency power to strengthen nonprofit regulation. It would be akin to the Financial Industry Regulatory Authority, which oversees stockbrokers and brokerage firms. Marcus S. Owens, the former head of the IRS Tax Exempt and Government Entities Division, has made similar recommendations.
While the states have made little headway, the IRS has made some adjustments. In 2014, it introduced Form 1023-EZ, which allows small charities to file a very abbreviated application for tax-exempt status with no formal review by the IRS, to eliminate its backlog of applications and to focus its human resources on audits. This change, though, has been widely criticized by the charitable sector as making oversight worse because small charities can now form with no IRS check on basic compliance. It has also tried to zero in on high-priority charities such as hospitals and universities.
What does this mean in terms of the Johnson Amendment and Trump’s wish to destroy it? There are real problems with charity regulation, but they have nothing to do with regulatory overkill.