Saturday, May 05, 2007

The IRS is making non-profit news

Late this past week came two significant news items regarding the Internal Revenue Service: that the agency is finally going to revamp the core annual reporting requirements for non-profits, and that the agency's chief is departing to take over the troubled American Red Cross.

[Both of these changes were reported in news articles which are not online, yet at least: the first item in Friday's Wall Street Journal and the second item in this week's Chronicle of Philanthropy. Both newspapers based their articles on extensive quotes from various parties both on and off the record, and neither item is being denied by anyone.]

The redesign of the federal Form 990 is long overdue; as the Journal puts it the form "has over 100 line items of information in haphazard order, the result of decades of additions by the tax agency without a complete revamp. A reader finds a charity's revenue listed pages before learning what the group does. Questions about officers, directors and other key employees are often scattered many pages apart." The revamp appears to be mainly aimed at reorganizing the thing so it flows in a logical order.

Unfortunately that won't get at the bigger issue which is the lack of any requirement to report actual results other than financial. The head of the IRS's tax-exempt organization unit
says, "I'm pretty sure the public doesn't want the government deciding who's effective and who isn't." She's missing it; no one argues for the federal government ranking non-profits' effectiveness. (I mean seriously, can you imagine? Might as well let a federal bureaucracy decide who's best on "Dancing With The Stars".) No, what would be a real step forward would be simply a requirement that non-profits report each year some measure(s) of effectiveness. Let organizations themselves decide what that is and then let the marketplace of informed donors and watchdogs decide who is being smartest about that. The governmental role here would be simply to enable a free market of comparisons, just like it does with regard to investing in for-profit corporations.

Meanwhile New York Times reporter Stephanie Strom broke the story that IRS chief Mark Everson is leaving to take over the Red Cross, which has recently been in some crisis. Whether he is a good fit for that organization is open to debate (I lean slightly towards yes); it does seem like a good sign for them that they can land someone with a resume of his caliber.

The Chronicle rightly notes, though, that Everson has in his four years running the IRS sharply increased the agency's focus on tax-exempt organizations. While some of the specifics of that have seemed weak (see above) or dubious (the NAACP and All Saints Episcopal Church audits had the scent of partisan politics), in the big picture we clearly need more focus on this booming civic sector not less. Hopefully the next agency director will understand that.


Stephen Drone said...

By "measure of effectiveness" do you mean something like reporting how much income went to actual charity work vs. what went to various non-charity expenses like administration?

I can see how that'd be handy.

Paul Botts said...

Actually no, that's not what I meant. First because how much of the revenues went to program work is the sort of standard measure that Charity Navigator and other sources have made easily available now, so there's no particular need to ask non-profits to put it on their tax returns.

And more importantly, that measures only efficiency not effectiveness. What's needed is regular measurement of _results_, in other words what did the money spent on the charity work accomplish towards the charity mission goals? How many kids were enrolled in the art education program and how did the experience change them? etc.

There is no easy obvious measurement for such things, which enables the standard excuse that "what we produce can't be measured like selling cars or making profits." What I'm after is the IRS simply saying "you must report some measure of effectiveness, what it is is up to you, it will be public record and the marketplace of donors and your peers will debate whether it does or doesn't prove anything about your non-profit and its work."

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