More Charities Seek Tax Break for Donors, Costing U.S. Billions - NYTimes.com

More Charities Seek Tax Break for Donors, Costing U.S. Billions - NYTimes.com

The number of organizations that can offer their donors a tax break in the name of charity has grown more than 60 percent in the United States, to 1.1 million, in just a decade.

Experts say nonprofits are skillfully exploiting the tax code’s broad and elastic definition of what constitutes such a charity, making it difficult for the Internal Revenue Service, which must bless them, to say no. The agency approved 99 percent of the applications for public charity status last year, according to a new study by students at Stanford University — or more than one every 10 to 15 minutes.

Take the Woohoo Sistahs, a social club that won approval last year. Its 50 or so members meet regularly over drinks and dinner in the Hampton Roads area of Virginia and raise money for cancer research and other causes through walkathons and sales held in retailers’ parking lots.

What the Sistahs do is not so different from what the Shriners have done for decades to raise money for their hospitals — except that the Sistahs can offer their donors a tax break that the Shriners cannot because decades ago they registered as a different type of charity with the I.R.S. (Direct donation to Shriners hospitals are deductible.)

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Last year, the I.R.S. approved such groups as a charity formed to ensure a “chemical free” graduation party at a high school in Monticello, Minn.; two donkey rescue organizations; and two new chapters of the Sisters of Perpetual Indulgence, a group of cross-dressing “nuns” who recently raised more than $25,000 for AIDS treatment and other causes with an event featuring a live S-and-M show.
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While no one contends that even a small portion of the new charities are fraudulent, critics argue that the I.R.S. and state regulators cannot keep up with the growth of charities — and therefore cannot possibly determine whether the applicants are adhering to state and federal regulations and laws.

Indeed, the students at Stanford found that while the I.R.S.’s electronic database records more than 40,000 new charities, its much more widely circulated annual Data Book puts the figure at more than 50,000, a discrepancy of more than 20 percent.

“It just seems utterly implausible that anyone can be doing due diligence in any way that constitutes a serious review of the applicant, let alone keeping an eye on them after they are approved,” said Rob Reich, an associate professor of political science at Stanford, whose students did the study on the growth of charities, titled “Anything Goes: Approval of Nonprofit Status by the I.R.S.”

“Why bother to have a review at all if you only reject 0.5 percent of the applicants?” he said.