Public Charity Status and Revenue Misreporting in the Not-for-Profit Sector

• In Event: NonProfit Accounting
  In Paper Session: Nonprofit Accounting

Abstract

Public charity status provides not-for-profit (NFP) organizations with access to the market for tax-deductible donations and privileged tax status at Federal, state and local levels. Because many organizations must report minimum levels of revenues from public sources to sustain these benefits, the threat of losing public charity status implies compelling incentives for organizations to misreport the source of revenues on the public support tests. First, we examine whether tax incentives to maintain public charity status are associated with misreporting on the public support tests and whether governance mechanisms constrain this misreporting. We find that the likelihood of misreporting is positively associated with both the NFP’s reliance on donations and the magnitude of potential excise and other taxes from which public charities are exempt. However, external monitors are not consistently associated with the likelihood of misreporting. Second, we examine enforcement of public charity status and identify 9,227 unique NFPs whose tax returns suggest that they should have lost public charity status during the period 1998-2007. Nearly two-thirds of these organizations repeatedly fail the public support tests but continue to file returns as public charities. While the magnitude of tax-exempt gifts, grants, and contributions to these organizations exceeds $1.3 billion following consecutive failures, our estimates of the potential excise taxes owed by these NFPs suggest that stricter enforcement is unlikely to generate substantial revenues at the Federal level.

Authors

• Shawn Jacob Gordon, University of Illinois-Urbana-Champaign

• Anne Margaret Thompson, University of Illinois-Urbana-Champaign