Each 501c3 Is Now

May 1, 2005       Todd Cohen      

A milestone was hit without fanfare during this past summer. And, the Internal Revenue Service (IRS) can’t even tell when, exactly, the event took place.

There are now more than 1 million 501(c)(3) organizations in the nation. The number, as of the most recent IRS count, is 1,010,365. The total number of nonprofit organizations in the United States stands at 1,540,554, according to the IRS.

According to the IRS Master File, new c3s have been popping up at the rate of about 40,000 per year. In 2001, there were 865,096 501(c)(3)s. In 2002,the IRS listed 909,574, while at the end of 2003 there were 964,418.

“There has been enormous growth in 501(c)(3)s,” said Gary Bass, executive director of OMB Watch in Washington, D.C. “But, we don’t have a good read on how many of those million still exist.” Churches and those charities with income of less than $25,000 do not have to file a Form 990. Some charities might still exist but in a sort of nonprofit twilight zone, not having filed dissolution papers, Bass said. So, it is difficult to track how many charities continue to operate.

“Our primary concern with the proliferation of 501(c)(3)s is that they are not aware of best practice standards, which are critical to all fundraisers,” said Walter Sczudlo, executive vice president of the Alexandria, Va.-based Association of Fundraising Professionals (AFP).

“We’ve been watching the growth with great interest,” Sczudlo explained. “What also concerns us is that this proliferation of charities is creating a huge competition for donor dollars. There are so many charities now, going after so few dollars and it’s getting parsed out so finely.”

However, a type of “nonprofit Darwinism” ends up occurring. Said Bass, “Those that are serving a real need float and those that don’t, sink.” Because some of the charities are large with far more resources than their smaller brethren this “fosters an unhealthy competition,” Bass added.

Eugene R. Tempel, executive director, of the Center on Philanthropy at Indiana University, sees two sides to the issue. “On one side is the argument that the sector has grown so much that it is not stable. On the other side is pluralism. It’s the defining character of our society that if someone does not like something, they can go out and form a 501(c)(3) and work to make things better.”

Sczudlo suggested there are two ways to handle the situation and that’s to either form alliances with charities of a similar nature or go out of business. “You never want to stifle good charitable intentions but if these fundraisers are good, the sector might be better served if they went to work for established charities.”

“It’s efficiency versus pluralism,” Tempel said. “There is real tension in the nonprofit sector over this. Sometimes through consolidation, it can operate to a larger construct.”

Sczudlo said, “I don’t know if it’s a bad thing if there are 1 million charities, but it can lead to confusion on the part of the donor.”

In addition to seeing two sides to the discussion, Tempel said he also sees two benefits. “On the one side there is the belief that you should not do anything to the character of society, such as make it more difficult to form a charity. Those that would suggest making it more difficult should be very cautious. While on the other side, the smaller charities might be able to combine some of their operations. They can look at their neighbors, see what they are doing, and share services. There might be some economies of scale.”

“They may find that it is better to combine their back office operations,” Tempel suggested.

But larger doesn’t always mean better when it comes to operations, he added. Sometimes the smaller, more transparent charities run better and more efficiently than the larger groups.

Bass said he too favors pluralism, saying that 501(c)(3)s are created when people “often see a need or perceived problem, and sometimes these organizations flourish.” But, in some cases there is an overlap where several charities will be working on the same issue, which leads to a competition for donors and some don’t make it.

Donors should be informed about the tension in the sector that comes with pluralism, Tempel said.

Sczudlo said that since Sept. 11, 2001 and the revelations that a few charities were raising funds for terrorist organizations, the IRS has tightened up some of its regulations concerning 501(c)(3) making it more difficult to form one.

“We try to be attentive to the requirements of receiving 501(c)(3) status,” said Eric Smith, IRS press officer. “We want to make sure donors, that when they give to charities, they can have confidence in the organization.” The IRS regularly “tweaks” its guidelines when it “identifies areas of non-compliance,” Smith added.

Said Bass, that is what’s needed. “We need better enforcement of the rules. Yet with a surfeit of charities, that might make it more difficult.”

One of the suggestions that has been bounced around in the sector is that 501(c)(3)s should be made to renew their status with the IRS. Some have said it should be done every five years to help weed out those that are no longer operational. It would also help identify some of the bad actors in the sector.

Bass said he is not sure if forced renewals is the way for the government to go or if increasing staffing at the IRS to more closely monitor the sector is a better idea. First “we have to identify the problems within the sector,” he said. “There are those out there bemoaning the number of charities when what they really should be doing is focusing on finding out what the real problems are,” Bass added.

“There is not a crisis that there are too many charities,” Sczudlo added. “And, we don’t really see a crisis that requires the oversight of the (U.S.) Senate.”

Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee has been conducting hearings on the nonprofit sector, but Bass said, he (Grassley) hasn’t said what he’s really looking for. “It’s all generating ants in the pants in the nonprofit sector,” Bass added.

“A million charities, it’s just a barometer of the times,” said Bass. “Maybe it’s just a measure of the number of social issues that need to be addressed.”

Todd Cohen is editor and publisher of Philanthropy Journal, an online newspaper at www.philanthropyjournal.org. He can be reached at tcohen@ajf.org.