Document Type

Article

Publication Title

University of Tennessee Legal Studies Research Paper

Abstract

Each year, the IRS awards 501(c)(3) status to thousands of unworthy organizations. As a result, these undeserving organizations do not have to pay federal taxes and donations to these entities are tax-deductible. This is because the IRS, facing increasingly severe budget cuts, adopted a woefully inadequate application process that fails to identify even the most obvious of unworthy applicants. The result of this regulatory failure may prove to be catastrophic. As unworthy charities proliferate, the public will lose faith in the entire charitable regime. As trust dissipates, donations are certain to follow, and the charitable sector will lose a vital revenue stream. It is not an exaggeration to say that the loss of donations represents an existential threat to the entire charitable sector.

With a change in budgetary priorities unlikely in the foreseeable future, it would be unwise to wait for the IRS to curb this threat. Rather, it would be prudent to identify another way to increase regulatory compliance in the charitable sector. This article proposes a cost-efficient mechanism for states to fill the regulatory void left by the IRS. To identify this mechanism, this study reviewed 500 formation documents in five different states, identifying the state procedures that resulted in the highest level of regulatory compliance. By replicating the procedures identified in this article, individual states will not only ensure higher levels of regulatory compliance, but also help restore the public’s trust in the charitable sector.

Publication Date

3-2021

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