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Nonprofit Abuses Won't Stop Without Tougher Rules and Regulators

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With the growing number of abuses at nonprofit groups, the tax-exempt system in the United States cries out for better regulation.

Theft and fraud plague charities, self-dealing is on the rise, excessive compensation is increasingly widespread, nonprofits boards are abusing their fiduciary responsibilities, and telemarketers are cheating donors and providing little benefit to the organizations they are supposed to support.

The public should be appalled by this state of affairs.

Unfortunately, the problems get little public attention because many, if not most, nonprofits and regulators have chosen to soft-pedal the issue. Nonprofit leaders are afraid that any disruption in the current system is likely to dampen charitable giving at a time when both government and private money are tight.

What's more, some of the largest charities and foundations fear any additional regulations or tough enforcement, saying that will lead to too much government intervention.

To turn around the situation, some experts have proposed that we put the Internal Revenue Service out of the business of regulating nonprofits and create a separate, independent entity along the lines of the Securities and Exchange Commission or the British Charity Commission to oversee nonprofit groups.

Such a new entity would need to be politically independent, headed by an outstanding leader with a reputation for integrity, appointed by Congress for a fixed term and provided with a budget and tools needed for the job.

If a separate agency can't be created, the IRS could take a step in the right direction by creating an ombudsman so donors and others could report concerns about organizations abusing their tax-exempt status.

Politically, however, it would be exceedingly difficult, if not impossible, for Congress to agree to a drastic restructuring of the regulatory system.

While it's important to keep the pressure on lawmakers to adopt big structural changes, it's probably best also to push for changes that have a more realistic chance of passage.

Among the top changes that are needed:

Strengthen regulations. Many need to be clarified and made more precise so nonprofits can better understand what is unacceptable.

For example, the rules on excessive compensation now allow too much wiggle room, especially because they let nonprofits compare their pay with businesses. That's why hospitals and colleges so often can get away with paying their leaders salaries that exceed $1-million.

Similarly, a regulation that forbids self-dealing among foundations has so many loopholes that it does little to prevent wrongdoing.

Regulations governing earnings from businesses not related to a group's mission need to be strengthened; plenty of big businesses run by nonprofits are now able to escape taxation.

In many cases, new regulations must be adopted. The self-dealing provisions on foundations should be extended to cover all nonprofits, a measure that would curtail a growing, unhealthy trend among nonprofit boards to enter into financial deals that benefit some of their members.

Nonprofit hospitals should be required to devote a minimum amount of their budgets (say 5 percent) to charity care for poor and uninsured patients.

Sharply increase the money the IRS spends to monitor charities. The excise tax on private foundations was enacted to finance the IRS's oversight and policing of nonprofit organizations. It has not served that purpose. Instead, only a small portion of this money pays for regulatory and oversight activities. The IRS has some 500 staff members responsible for examining whether America's more than 1.1 million charities follow the law.

Similarly, the IRS is incapable of providing a thorough assessment of the tens of thousands of new organizations that apply for charity status every year. Less than 1 percent of groups that apply are rejected for not meeting basic standards.

Nor is there sufficient money for the IRS to review nonprofits' tax status on a periodic basis, say every five years, to make certain they are still viable charitable organizations.

If the Internal Revenue Service, or any other agency, is to carry out effectively its nonprofit regulatory function, it will require at least four or five times the money the IRS currently spends to oversee nonprofits. By refusing to provide this type of budget, Congress has demonstrated a total lack of concern for both the sector and public accountability.

Bolster the ability of state attorneys general. With the exception of seven or eight states, the state attorney general's offices have so few resources that they can't really police the nonprofits in their states. Even those with large staffs sometimes are inhibited by the political influence of their elected attorneys general.

Pennsylvania's nonprofit scandals--such as allegations of rampant self-dealing at the Milton Hershey School and the child sex abuse that Penn State University failed to stop--are prime examples.

As long as attorneys general are elected, efforts should be made to depoliticize their nonprofit oversight units, insulating them with their own advisory boards and ombudsmen.

All attorneys general offices are starved for money. Either state legislatures need to appropriate more funds for their operations--an unlikely option at this time--or Congress should provide them with matching funds to enlarge their staffs and take a more aggressive stance.

Perhaps the IRS could borrow an idea like the Race to the Top competition run by the Education Department to encourage states to compete for money to improve their regulatory efforts.

Create nonprofit watchdogs to monitor the enforcers. The Center for Effective Government was created 30 years ago to monitor the Office of Management and Budget and hold it accountable (hence its original name, OMB Watch). It did a great job in pushing the budget office and other government agencies to be more transparent.

A similar nonprofit organization should now be started to keep an eye on nonprofit regulators at both the federal and state levels.

Foundations should be eager to pour money into such a group, since their prime concern must always be the integrity of the nonprofit organizations they support.

Grants to such a nonprofit would be a wise investment that could pay great dividends over time.

While all those changes could make a difference, what matters most is that political and nonprofit leaders take forceful action to stomp out charity and foundation abuses.

The Senate Finance Committee and the House Ways and Means Committee, the key Congressional oversight panels for nonprofit organizations, have demonstrated little desire to do so thus far.

Sen. Charles Grassley, an Iowa Republican, is an exception. He has raised lots of concerns about nonprofits but has been reluctant to go beyond issuing news releases to take tough action. Unless some other lawmakers step up to the plate, the chances for real change will be slim.

Some of the self-styled leaders of the nonprofit world, such as Independent Sector and United Way Worldwide, are in part guilty for this state of affairs. The big nonprofit associations have never pushed hard for major regulatory changes and substantial increases in money to regulators at both the federal and state levels. It's about time they and members of Congress change their tune.

If regulators, lawmakers, donors and others don't take action soon, scandals will continue to rise, donors will start losing their trust in nonprofits, and eventually the people who depend on charities for services will have nowhere to turn.

Pablo Eisenberg, a regular Chronicle contributor, is a senior fellow at the Center for Public and Nonprofit Leadership at the Georgetown Public Policy Institute. His e-mail address is