Do Nonprofit Organizations that Self-prepare their Tax Returns receive Lower Donations?

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Abstract

This study examines the association between nonprofit organizations (NPOs) that self prepare their tax return versus those that hire a paid preparer and its impact on donations. Specifically, we attempt to replicate Neuman, Omer, and Thompson (2015). Neuman et al., in a comprehensive paper on determinants and consequences of choice of tax service provider by nonprofit organizations (NPOs), find NPOs that self-prepare their tax return in a given year receive significantly lower donations in the following year. Neuman et al. results find self-preparation of the tax return is associated with 3.9% lower donations in the next year. In our replication of this model, we find that self-preparation of the tax return is associated with 11.9% lower donations in the next year 11.9% (this is at mean levels of donations in their sample). This finding suggests that donors are aware of whether NPOs self-prepare their tax return and view self-prepared tax forms negatively, that self-preparing a tax return is correlated with some omitted factor that is negatively associated with lower donations, or that self-preparing may be part of a cost-reduction program stemming from an actual or anticipated reduction in revenues. Neuman et al. test a model of donations that includes numerous control variables not included in any prior study on the determinants of donations and omit some variables included in prior studies. They report parameter estimates for control variables that are generally inconsistent with prior studies and find not significant some control variables that are significant in prior studies. We attempt to replicate their findings with similar data and a similar model and to test the robustness of their results using two established models of donations from the literature. We find contrary results from testing a model similar to that of Neuman et al. and two other models from the literature indicate that NPOs that self-prepare their tax forms do not receive lower donations than NPOs that hire a paid preparer.

Authors

• Nicholas P. Marudas, Auburn University - Montgomery

• Julie Petherbridge, Mercer University - Atlanta

• Maria A Leach, University of Southern Mississippi