The Internal Revenue Service issued its annual compilation of agency data yesterday. In what was a surprise to many, the number of approved applications for 501(c)(3) status actually dropped in 2015 from 2014’s numbers. The 2015 fiscal year, which ended September 30, 2015, saw 86,915 applications approved, down from 94,365. It’s important to note, however, that despite the slight 8% drop, 2015 was the second highest year for approvals ever. By contrast, 2011, 2012, and 2013 fiscal years all reflect approval figures below 50,000.
Realistically, the issue isn’t so much the drop, but the record high numbers for both 2014 and 2015. The disastrous decision in 2015 by the IRS to introduce a streamlined application for smaller nonprofits, combined with staffing and budget cuts at the IRS’s Exempt Organizations Division, has resulted in a flood of unqualified, unvetted “charities” that never should have received status. According to a study by the IRS’s own internal watchdog office, the National Taxpayer Advocate, more than 1/3 of the charities receiving 501(c)(3) status since July 2015 should not have been approved!
What we are seeing is a slow-motion train wreck. With 1.2 million approved charities in the US, it is entirely likely that we’re approaching 10% that are observably illegitimate. Add in the ones that have flown under the radar for years, and it could be much, much higher. The IRS’s abdication of its federally mandated obligation to properly vet ALL nonprofit applicants will, in the end, cost small charities dearly. We’re already aware of major grant-making foundations that will no longer accept funding requests from small charities that got their status through the abbreviated process.
Make no mistake: The large number of annual charity approvals is not a net positive for charitable organizations or the communities they serve…and this is coming from the CEO of a company that provides formation services to new nonprofits! Our credibility as a company comes from being both an vocal advocate for private charity and as a service provider with an uncompromising commitment to compliant best practice. It’s time for the IRS to admit its mistake and do what’s right for America’s nonprofits.