On Monday, May 17, the IRS began revoking the tax-exempt status of organizations that have failed to file Form 990 or, for smaller organizations, the 990-N postcard, for three consecutive years. This may be the best thing to happen in the sector in years.
Blasphemy? I don’t think so. There are more than 1.5 million registered nonprofits in the U.S. Half of those first applied for tax-exempt status in the past 20 years. The proliferation has been particularly notable in smaller organizations — a ten-fold increase in organizations with revenues under $100,000 since 1990. To date, there has been almost no barrier to getting the tax-exempt status approved. While the IRS requires filing a hefty list of documents— application, employer ID, organizing documents, financial data, a description of the planned activity – there is no requirement that the founders analyze whether other, similar organizations are already in place. The result is there are often two or more, frequently quite small, organizations in the same area with essentially the same mission.
While there are many reasons NOT to compare the nonprofit sector with the for-profit sector — mission motive versus financial motive, public trust versus shareholder interests, to name two — one reasonable comparison could, and should, be made here. No for-profit company would start up without doing a thorough analysis of the competitive landscape; that analysis would be baked into the business plan and would inform all other decisions — one of which might be "not here, not now." It’s incumbent upon our sector to school itself on this point: just because we have an idea, and a mission, and a great, good heart, does not mean that we need to start our own, brand-spanking new organization to fulfill that mission. The same truth applies to organizations in all stages of their lifecycle. Boards should be asking themselves: are we still relevant? Are we fulfilling our mission effectively and sustainably? Is there another organization across town doing the same thing, only better? Should we be discussing merger, or even dissolution?
These strategic questions must be asked by all nonprofit boards, at the outset and periodically as they continually evaluate their organizations’ effectiveness at fulfilling their mission. If more boards did so, it would not be the IRS that was making the cuts: it would be the organizations themselves — proactively, strategically, and thoughtfully. Let’s not let our big hearts get in the way of upholding that all-important public trust.
Update, 5/19: The IRS has issued a statement that organizations that missed the filing deadline should go ahead and file anyway, and the IRS “will do what [they] can to help them avoid losing their tax-exempt status.”