Why Isn’t the IRS Cracking Down on Nonprofits?

The tax structure in the United States is confusing, ensnaring, and calculated to benefit those who already have the most, while targeting those who have the least. Even as major corporations avoid much of their tax liability, so do wealthy individuals with the tools and the power to hide their money, while those of us struggling in the working, lower, and lower middle class can’t afford the necessary tricks to make our money disappear — nor should we, for taxation supports social services in the United States. The problem is that not everyone is paying their fair share, limiting access to resources and benefits.

But there’s another huge problem with taxation in the US, and that’s nonprofits. Nonprofit status ostensibly seems like a good idea: If an organisation is working for the good of the people, providing services and working to improve the world, surely it should deserve a break on funds it brings in. If those funds are being directly retrenched into social initiatives like lobbying for environmental protection, providing resources for the homeless community, or working on racial issues in the United States, it’s not quite like they’re corporate profits, are they?

Except that nonprofit status is complex, especially for churches. Nonprofits need to meet some very specific standards to be considered for and to retain their status, including providing open records for members of the public and the IRS, and putting benefits above profits. Yet, we have nonprofits paying their CEOs hundreds of thousands and sometimes millions of dollars, which directly contravenes their missions. Meanwhile, churches are violating their nonprofit status by explicitly getting involved in political causes, even though they are supposed to remain separate from the state if they want to continue enjoying tax-exempt status.

Some argue that high CEO and other administrative salaries are necessary in order to be competitive, that if nonprofits can’t offer such funding, they’ll get second-rate administrators. But administrators concerned primarily with their own profits aren’t exactly the kind of people who should be left in charge of nonprofits, as they’re not really setting a good example — and it’s possible to be competitive in other ways, and to seek out recruits from communities where public service is more important than owning a fancy home or driving a nice car. It’s possible to lead a nonprofit to success without driving a Maserati. In fact, one might argue that nonprofit administrators should be taking a pay cut over other staffers to send a clear message that the organisation is primarily concerned with its core mission, which isn’t lining the pockets of executives.

Churches, meanwhile, try to argue that their faith should be able to include engagement with society, which it definitely does. However, when churches engage in politics, they have advantages that other political groups, which do have to pay taxes and make certain filings, do not. Thus, candidates get an unfair advantage through church support, as do specific political causes, and that’s not reasonable, or democratic. If churches like the Mormon Church want to be involved in politics, that’s fine, and I actually support it — they do have a right to contribute to society in ways that align with their faith. But they don’t have a right to be considered tax-exempt while they’re doing it, because they’re joining the political fray and that means the terms of the game have changed.

If a nonprofit is truly offering social services, outreach, education, and other measures intended to improve the quality of life for all of us, or for specific marginalised groups, it should continue to qualify for that status. If it’s not, or if gross inequalities are represented in its structure, it’s time for it to be reclassified. This is where the IRS is failing — not only is it not enforcing the tax law that affects major corporations, but it’s also not acting on faux nonprofits that hide behind that status to move huge amounts of money with no accountability.

Where is the IRS for these violations of the tax code, and of democracy? Surely the agency recognises such groups as the major plums they would be — why waste your time with small-time tax fraud when you could be bagging much, much bigger fish? Yet, mysteriously, the agency seems to be remaining silent on these issues, taking little action and releasing few public statements. Why isn’t the IRS articulating a clearer and more effective policy on nonprofits that really shouldn’t be classified that way anymore?

Lobbying? Internal pressure? Political pressure? The IRS is supposed to be an independent agency focused on collecting tax revenues from across the US with which to fund government initiatives. It shouldn’t be allowed to maintain such a biased stance, and it shouldn’t be making life easier for individuals, companies, churches, and groups who want to exploit nonprofit status. This matters. It’s important. Without decisive action from the IRS, these groups will continue to be able to take advantage of the structure of a tax code that favours them, and the people they truly work for. If the IRS has the goal of maintaining the status quo and limiting democracy, it’s doing a mighty fine job.

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Image: DC: IRS, Wally Gobetz, Flickr