CHAPTER TWO
Overview of Nonprofit Sector and Tax-Exempt Organizations
- § 2.1 Profile of Nonprofit Sector
- § 2.2 Organization of IRS
- § 2.3 EO Division's Reports and Work Plans
The nonprofit sector in the United States and the federal tax law with respect to it have a common feature: enormous and incessant growth. As to the sector, this expansion is reflected in all the principal indicators, such as the number of organizations, the sector's asset base, the amount of charitable giving and granting, its annual expenditures, its share of the gross domestic product, and the size of its workforce. There is, however, this direct correlation: As the nonprofit sector expands, so too does the body of federal and state law regulating it. No end to either of these expansions is in sight.1
Over the years, there have been many efforts to analyze and portray the nonprofit sector. One of the first of these significant undertakings, utilizing statistics, conducted jointly by the Survey Research Center at the University of Michigan and the U.S. Census Bureau, was published in 1975 as part of the findings of the Commission on Private Philanthropy and Public Needs, informally known as the Filer Commission.2 The data compiled for the Commission's use were for 1973. Contemporary charitable giving statistics are explored below, but one striking basis of comparison cannot be resisted at this point: Charitable giving in the United States in the year the first edition of this book was published—1975—was $28.56 billion, whereas for 2017 the amount of charitable giving was an estimated $410.02 billion (the first time annual giving in the United States exceeded $400 billion).3
Research of the nature developed for the Filer Commission spawned recurring statistical portraits of the sector. One of the most comprehensive of these analyses is that provided in a periodic almanac published by the Urban Institute.4 Others include a fascinating portrait of the “third America”5 and the annual survey of charitable giving published by the Giving USA Foundation.6 The IRS's Statistics of Income Division collects data on tax-exempt organizations.7 Further, various subsets of the nonprofit sector are the subject of specific portrayals.8
The nonprofit sector in the United States is not uniformly labeled; it goes by many names. In addition to nonprofit,9 adjectives used include tax-exempt, nongovernmental, independent, and voluntary. In its most expansive definition, the nonprofit sector comprises all tax-exempt organizations and some entities that cannot qualify for exemption. The Independent Sector coalition defined the independent sector as all charitable 10 and social welfare organizations.11
As Independent Sector defined the sector, it comprises “many, varied” organizations, such as “religious organizations, private colleges and schools, foundations, hospitals, day-care centers, environmental organizations, museums, symphony orchestras, youth organizations, advocacy groups, and neighborhood organizations, to name a few.” This analysis continued: “What is common among them all is their mission to serve a public purpose, their voluntary and self-governing nature, and their exclusion from being able to distribute profits to stockholders.”12
§ 2.1 PROFILE OF NONPROFIT SECTOR
Any assessment of any consequence of the contours of the nonprofit sector includes a discussion of the number of organizations in the sector. Yet it is “surprisingly difficult to answer the seemingly simple question, How many nonprofit organizations are there in the United States?”13 The simple answer is: There are “several million” nonprofit organizations, although “no one really knows how many.”14
In an understatement, the observation was made that “[m]easuring the number of organizations in the independent sector is a complex activity, largely because of the diversity of its components.”15 There are several reasons for this. One reason is that churches (of which there are an estimated 350,00016) are not required to file annual information returns with the IRS,17 so that data concerning them is difficult to amass. Also, hundreds of organizations are under a group exemption18 and thus not separately identified. Further, smaller nonprofit organizations need not seek recognition of tax exemption from the IRS.19 Small organizations are not required to file annual information returns with the IRS but are required to electronically submit a notice as to their existence.20
One source of data in this regard is the IRS, which maintains a “master file” regarding tax-exempt organizations. This file contains a list of organizations that have requested recognition of tax exemption21 or that have filed annual information returns.22 On the basis of these compilations, the number of exempt organizations known to and interacting with the IRS is over 2 million. The most recent analysis posited the population of U.S. exempt organizations (as of 2012) at 2.3 million entities.23 Of these organizations, 1.63 million were recognized as exempt by the IRS, and 1.08 million of them were charitable organizations.24 An estimated 274,000 of these charitable organizations filed annual information returns.25
Because a “price cannot be placed on the output of most nonprofit organizations,” their percentage of the gross domestic product is difficult to assess; the conventional estimate is that it is about 5 percent.26 The federal government relies on charitable organizations to deliver services; in 2012, government agencies paid an estimated $137 billion to exempt organizations for services.27 When the measure is in terms of wages and salaries paid, the percentage arises to approximately 8 percent.28 Other ways to measure the size of the sector are its revenue (about $1,006.7 billion),29 its outlays (about $915.2 billion),30 and its paid employment (12.9 million).31 Most of the sector's revenue is in the form of fees for services provided, followed by contributions and grants.32 As to outlays, the funds are expended by the organizations (88.7 percent), granted (8 percent), or invested or used as a buffer for cash flow (3.3 percent).33
The number of public charities is said to be 876,164.34 Public charities had $1.1 trillion in expenses and $2 trillion in total assets.35
The breakdown as to these tax-exempt organizations36 shows that approximately one-half of them (984,386) are charitable organizations.37 As to other categories of exempt organizations, there are about 100 instrumentalities of the United States,38 5,850 single-parent title-holding companies,39 1,133 title-holding companies for multiple beneficiaries,40 116,890 social welfare organizations,41 56,819 labor and agricultural organizations,42 71,878 business leagues (including associations),43 56,369 social clubs,44 63,818 fraternal beneficiary societies,45 20,944 domestic fraternal beneficiary societies,46 10,088 voluntary employees' beneficiary societies,47 14 teachers' retirement funds,48 5,901 benevolent or mutual associations,49 9,808 cemetery companies,50 3,565 credit unions,51 1,646 mutual insurance companies,52 16 crop operations finance corporations,53 300 supplemental unemployment benefit trusts,54 35,113 veterans' organizations,55 28 black lung benefits trusts,56 10 organizations providing medical insurance for those difficult to insure,57 12 state-formed workers' compensation organizations,58 160 religious and apostolic organizations,59 18 cooperative hospital service organizations,60 1 cooperative service organization of educational institutions,61 1,400 farmers' cooperatives,62 13,000 political organizations,63 and 127,000 homeowners' associations.64
Charitable giving in the United States in 2017 is estimated to have totaled $410.02 billion.65 Giving by individuals in 2017 amounted to an estimated $286.65 billion; this level of giving constituted 70 percent of all charitable giving for the year. Grantmaking by private foundations is an estimated $66.9 billion (16 percent of total funding). Gifts in the form of charitable bequests in 2017 are estimated to be $35.7 billion (9 percent of total giving). Gifts from corporations in 2017 totaled $20.77 billion (5 percent of total giving for that year).
Contributions to religious organizations in 2017 totaled $127.37 billion (31 percent of all giving that year). Gifts to educational organizations amounted to $58.9 billion (15 percent); to human service entities, $50.06 billion (12 percent); to foundations, $45.89 billion (11 percent); to health care institutions, $38.22 billion (10 percent); to public-society benefit organizations, $29.59 billion (7 percent); to international affairs entities, $22.97 billion (6 percent); to arts, culture, and humanities entities, $19.51 billion (5 percent); and to environment and animals groups, $11.83 billion (3 percent).
Here are some other perspectives on the nonprofit sector; it:
- Accounts for 5 to 10 percent of the nation's economy.
- Accounts for 8 percent of the nation's noninstitutional civilian employees.
- Has more civilian employees than the federal government and the 50 state governments combined.
- Employs more people than any of these industries: agriculture, mining, construction, transportation, communications, and other public utilities; and finance, insurance, and real estate.
- Generates revenue that exceeds the gross domestic product of all but six foreign countries: China, France, Germany, Italy, Japan, and the United Kingdom.66
§ 2.2 ORGANIZATION OF IRS
Among the departments of the United States government is the Department of the Treasury, which is headed by the Secretary of the Treasury. One of the functions of the Treasury Department is assessment and collection of federal income and other taxes.67 The Secretary is authorized to conduct examinations,68 serve summonses,69 and undertake what is necessary for “detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same.”70 This tax assessment and collection function has largely been assigned to the IRS, which is an agency (or bureau) of the Department of the Treasury.71
The Department of the Treasury formulates the nation's tax policies, including those pertaining to tax-exempt organizations.72 This policy formulation is the direct responsibility of the Assistant Treasury Secretary for Tax Policy.
(a) IRS in General
The mission of the IRS is to “provide America's taxpayers with top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.”73 One of the functions of this agency is to administer and enforce the law of tax-exempt organizations. The mission and functions of the IRS have been substantially influenced by a massive restructuring of the agency, in part due to the mandates of legislation74 and in part to initiatives undertaken by the agency as the result of a plan of reorganization that was implemented beginning in 1998.75
The IRS is headquartered in Washington, D.C.; its operations there are housed in its National Office. An Internal Revenue Service Oversight Board is responsible for overseeing the agency in its administration, conduct, direction, and supervision of the execution and application of the nation's internal revenue laws.76 A function of this board is to recommend to the President candidates for the position of Commissioner of Internal Revenue.77 The Commissioner, who need not be a tax lawyer or accountant but must have a “demonstrated ability in management,” serves one or more five-year terms.78 The Commissioner is charged with administering, managing, conducting, directing, and supervising the execution and application of the internal revenue laws.79
Within the Treasury Department is the office of General Counsel for the Department of the Treasury.80 This general counsel, who is appointed by the President, is the chief law officer of the Department. Among the associate chief counsels is the Associate Chief Counsel (Employee Benefits and Exempt Organizations). One of the functions of this Associate Chief Counsel's office is to develop policy and strategy in the field of the law of tax-exempt organizations.
Congress in 1998 directed the Commissioner of Internal Revenue to reorganize the IRS in a way that substantially altered the then-existing structure (which was based on regional divisions) by restructuring the agency into units serving groups of taxpayers81 with similar needs.82 Consequently, the IRS is organized into four operating divisions; this structure is reflected in the IRS's regional offices. These divisions are the Large and Mid-Size Business, the Small Business/Self-Employed, the Tax Exempt and Government Entities, and the Wage and Investment Divisions.
This reorganization of the IRS, in the form of a four-division structure, resulted in delegation to each division of the responsibility for developing procedures and establishing priorities for servicing its customers. In the words of a Treasury Inspector General for Tax Administration report, this organizational methodology “enabled each division to establish end-to-end accountability for its respective customer base.”83 This report, however, also stated that this “fragmented approach” to IRS operations is a “weakness” that frustrates the accomplishments intended by the creation of “IRS-wide” programs, one of which is the National Fraud Program.84
(b) Tax Exempt and Government Entities Division
The first of these four divisions—the Tax Exempt and Government Entities (TE/GE) Division—was established on December 5, 1999.85 Within the TE/GE Division is the Exempt Organizations (EO) Division, which develops policy concerning and administers the law of tax-exempt organizations. The director of the Exempt Organizations Division, who reports to the Commissioner of the TE/GE Division, is responsible for planning, managing, and executing nationwide IRS activities in the realm of exempt organizations. This director also supervises and is responsible for the programs of the offices of Customer Education and Outreach, Rulings and Agreements, Examinations, and Exempt Organizations Electronic Initiatives.
The Customer Education and Outreach office develops the nationwide education and outreach programs of the IRS for tax-exempt organizations. Revenue agents, tax law specialists, and other support personnel staff this office, initiating and delivering programs and products designed to assist exempt organizations understand their tax law responsibilities. These programs are intended to improve compliance with the federal tax law by exempt organizations. This office's efforts result in workshops and other presentations by the IRS, publications and forms, Web-based programs, marketing and other communications programs, and support for programs of the Examinations office.86
The Rulings and Agreements office is the function that is primarily responsible for up-front, customer-initiated activities such as determination applications, taxpayer assistance, and assistance to other Division offices.87 This office includes EO Technical and EO Determinations, the latter being the function that is primarily responsible for processing initial applications for recognition of tax-exempt status. It includes the main Determinations office located in Cincinnati, Ohio, and other field offices. Applications are generally processed in the centralized Determinations office in Cincinnati.88 The IRS's lawyers in the field are part of the Office of Division Counsel (TE/GE); those in the Office of Associate Chief Counsel (TE/GE) are part of EO Technical.89
The Examinations office focuses on tax-exempt organizations examination programs and compliance checks. Its support functions include Examination Planning and Programs, Classification, Mandatory Review, Special Review, and Examinations Special Support. An Exempt Organizations Compliance Unit addresses instances of exempt organizations' compliance with the tax law by conducting compliance checks. Another component of this office is the Data Analysis Unit, which uses various databases and other information to investigate emerging trends in exempt organizations' operations, in an effort to select subjects for examination in the exempt organizations area. A Review of Operations unit engages in follow-up reviews of tax-exempt organizations. The Compliance Strategies Critical Initiative coordinates the Division's strategic planning, monitors progress of critical initiatives, and analyzes the results of these projects.
The Electronic Initiatives office manages and coordinates the development and deployment of new automation efforts to support evolving and expanding IRS administration and enforcement expectations, with the objective of balancing customer satisfaction, employee satisfaction, and business results. The projects of this office include implementation of the agency's annual information returns electronic filing program,90 development of an interactive Web-based application for recognition of exemption to be filed by charitable organizations,91 and support of the operations of the Data Analysis Unit.
Also within the TE/GE Division are the Employee Plans and Government Entities functions. Within the latter are the Federal, State, and Local Governments; Indian Tribal Governments; and Tax Exempt Bonds offices.
The IRS has a National Fraud Program, which entails the coordination of the establishment of IRS-wide fraud strategies, policies, and procedures to enhance enforcement of the federal tax law. This program, which is within the Small Business/Self-Employed Division, facilitates coordination for all IRS divisions to identify and develop fraud cases. The Treasury Inspector General for Tax Administration criticized the TE/GE Division for ineffectiveness in implementing its share of the fraud program and caused the Division to implement a more centralized approach to fraud cases across the five offices in the Division.
§ 2.3 EO DIVISION'S REPORTS AND WORK PLANS
The Exempt Organizations Division annually publishes a report summarizing its accomplishments for the fiscal year just concluded and a work plan inventorying its forthcoming projects. In recent years, these reports have become long on management matters and production of online technical products and short on new initiatives involving the law of tax-exempt organizations. Nonetheless, these documents are required reading for exempt organizations practitioners.92