Finance

IRS 990 Backlog Hampering Non-Profit Giving and Transparency

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ProPublica recently reported that the IRS has yet to release nearly a half million non-profit tax records. You may be wondering why that is something you should be concerned about. In fact, the lack of records release has some pretty significant implications for transparency and charitable giving. Drew McManus has been painstakingly combing through records since 2005 to assemble his annual Orchestra Compensation Reports.  I believe among the reasons why he didn’t have a 2022 edition examining the impact of the pandemic during the 2019-2020 fiscal year was partially due to the lack of 990 filings available for review.

Additionally, many individuals, corporations and foundations use the filing data to make giving decisions.

“This is having an impact on nonprofits, fundraising, donors … and charity regulators,” said Cinthia Schuman Ottinger of the Aspen Institute, who coordinates a group of practitioners who work with nonprofit tax data (ProPublica is a part of this group). “The whole ecosystem suffers when there are delays of this kind.”

Michael Thatcher, the CEO of Charity Navigator, said the end of the year is a crucial time for charitable giving.

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And, he said, “it’s not just the donors that are upset by this.” Many organizations want their latest information out there as well, especially if their finances have improved or they’ve done significant work in recent years. “They want to show that to the world, and guess what, when you go to Charity Navigator, you’re seeing two-year-old information.”

Many of the missing filings could help shed light on how organizations — and the nonprofit sector as a whole — have fared during tumultuous years marked by a pandemic, economic upheaval and large infusions of federal relief dollars.

Courtney Aladro, a charity regulator for the Massachusetts attorney general and NASCO board member, said that regulators across the country use the IRS repository of documents to confirm or corroborate the information that charities submit to their states….

“Those are some pretty important years because of some of the difficulties over the last few years,” Aladro said. “The use and expenditure of COVID relief funds, for example. It’s pretty important for charity regulators and law enforcement to monitor that, and not having that information will make it more difficult.”

The IRS has been hampered by underfunding and understaffing which has lead to both delays in release and embarrassing release of tax information that was not supposed to be released. A recent bill passed by Congress will seek to modernize systems and hire more staffing, but it could be years before the problems are ironed out.

Comp Tickets Are Not Cost Free Transaction

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Last month Drew McManus had box office manager Tiffin Feltner make a guest post on his Adaptistration blog on the topic of comp tickets.   It has taken me about three weeks to stop grinding my teeth long enough to make a post of my own on the topic.  You will see a lot of posts about optimizing ticket prices based on various criteria and I think those assume people have a handle on their comp ticket policies. But let me tell you, in my experience there are a lot of people out there you think would know better who have absolutely bonkers approaches to comp ticketing.

Feltner notes that about 40% of comps go unused. I wondered if that is a nationwide statistic or just what they have observed in terms of the venues they serve. Reports I have pulled from my ticketing system often show much greater rates than that.

Organizations I have worked at have ticketed events for rentals of our own venue as well as served as a community ticketing hub providing service to other organizations at their venues. Many times they are not only comping tickets for individual events, but providing comp subscriptions which results in a large number of empty seats for the entire year.

There are so many issues that arise because of comp ticketing decisions. First, because organizations like to comp tickets and subscriptions to important guests, they place them in large, consecutive groups in the closest rows. Which means if people don’t use the comps, you can have a nearly sold out event where the first 10 rows are virtually empty and those in attendance are packed like sardines in the back of the venue.

Then there are other cases when the event is sold out in the ticketing system and the client can’t get a special last minute guest in because they distributed the house seats held back for this purpose days earlier. Then of course, when the show starts there are a bunch of empty seats because so much of the house had been comped.

We have run into situations where the client decides a ticket holder has forfeited their seat by not showing up five minutes before, without ever having communicated that policy. (Because it didn’t exist until just now.) Sometimes the ticket holder shows up to find their seat occupied, sometimes that bullet is dodged.

Then there have been times the client tells us they have confirmed a ticket holder is not attending, asked us to assign the ticket to someone else, and then put a sign on the seat reserving it for a third person.

Not only are poorly considered ticketing policies bad optics and create poor customer relations, most of the time the ticketing staff ends up as the target of blame for these bad decisions–often by the people responsible for making these bad decisions. This is what makes me grind my teeth because all these bad feelings and awkward situations could be avoided with a little forethought and policy discipline.

In their guest post, Feltner suggests using a card that can only be redeemed on the night of the show as a solution to the comp issue. That is similar to an approach my staff has used with clients where we suggest unassigned blocks of seats strategically placed in places with good sightlines. These blocks can be assigned as needed when it is known what VIPs will be attending. This allows for better placement and assignment of seats prior to an event date.

However, there needs to be strong comp policy guidelines in place so that there isn’t a gradual creep back to 1/3 of the seats being comped well in advance.  If your venue scans tickets, you are probably able to pull a no-show report broken down by ticket category that can provide insight into how many of the comps are being used which can inform tweaks to the ticketing policy.

While I am advocating for a robust comp ticket policy, this is not to say that you shouldn’t be offering comp tickets. There are a lot of reasons why free admission is a bad idea, but it can be useful to achieve targeted goals. As Feltner mentions, it is important to have some sort of tracking mechanism in place to evaluate whether you are achieving those goals.

One thing to consider if you are offering comp tickets as a sponsorship or donor benefit is to ask the recipient if they plan to use the tickets. In my experience, a fair number of people provide support because they believe in the organization’s work, but don’t necessarily intend to redeem the benefits that come with the support.

Not only does that allow those seats to be filled, but it also allows a greater portion of their donation to be credited as tax deductible because they are not receiving material benefit. However, this benefit needs to be refused immediately at the time of the donation. You can’t ask people in December after you have had 8 events occur and then retroactively provide credit for unattended shows. If they do decide to attend one event at a later time, you can always comp them in then and make an appropriate adjustment to their donation credit.

Donor Advised Funds Receive More Giving Than Public Charities

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Earlier this month Vu Le of the Non Profit AF blog linked to a piece reporting that Donor Advised Funds (DAF) had surpassed charities as recipients of charitable revenue.  The problem with this, as I have previously written, is that unlike public charities which are required to spend at least 5% of their funding each year, donor advised funds have no such requirement but the donor gains the tax benefit of making a donation.

In other words, the government is subsidizing giving that is not necessarily providing any charitable benefit. From the Inequity.org article:

Of particular concern are DAF sponsors that are affiliated with for-profit Wall Street financial corporations. As we have documented, these commercial DAFs provide enormous publicly-subsidized tax benefits to their high-rolling contributors while actively encouraging the warehousing of charitable wealth. And commercial DAFs have been growing explosively.

In fact, the largest commercial DAF sponsors now take in more money each year than our largest public charities.

The article has an animated graphic illustrating how over time DAFs have occupied six of the top ten recipients of charitable revenue, displacing United Way Worldwide from its top spot to number four.

There has already been some discussion about how the required minimum 5% annual distribution by charities was a low bar to meet, especially since some of the charity’s administrative expenses and activities can count toward the 5% expenditure rather than purely distributed as grants.  So the fact that so much more money is being directed toward DAFs than ever before with no requirement that it be distributed is of growing concern.

All That Is Philanthropy Is Not Gold

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I have been following Lucy Bernholz, a self-described philanthropy wonk, for ages it seems. She writes the blog Philanthropy 2173 and is a senior researcher at Stanford’s Center on Philanthropy and Civic Society.  When I saw an interview with the AP about a how philanthropy isn’t all about money, I took a closer look.

And before I get into my post proper, if you are interested in hearing more, she is participating in a Zoom conversation on the topic on November 4 @4pm ET

Basically she says that there is more to philanthropy than giving money, though you wouldn’t know it from the way the news outlets and most non-profits focus on what billionaires are doing with their money. Or for that matter, the round up requests you get when you buy your groceries.  The result is that our understanding of non-monetary methods of philanthropy are pretty much stifled. Alternatives aren’t just volunteering and donating blood and organs. It can be donating genetic material for disease research or giving photographs to organizations which document historical events like the Japanese internment during World War II.

When Bernholz was asked about how tax law has impacted philanthropy, she gave the following response:

A: It never came up in our conversations. Only when we brought it up. What’s fascinating about that is only 8% of Americans bother to take the charitable tax deduction on their tax return. Now, tax policy is pretty much the only policy idea the philanthropy industry has any interest in. They’re serving 8% of the population. And I know that 8% is not Mark Zuckerberg. It’s not Pierre Omidyar. It’s not Laurene Powell Jobs. They’ve all said: “We don’t care about the tax benefit. We’re gonna do an LLC, because that gives us more control and more anonymity.” So there’s some 8% who care. In poker, they’d call that a tell. If and until the nonprofit and philanthropic industries start advocating for really rich people to pay their taxes, I think the view of that whole industry as a wealth preservation mechanism is quite justified.

It was surprising to learn that only 8% of Americans take the deduction. Gallup polling has shown about 80% of Americans donated every year pre-Covid. Granted, not everyone may donate to a level at which it makes sense to claim the deduction, but surely more than 8% donate above that threshold.

We frequently hear that the U.S. government subsidizes non-profits by allowing that deduction, but it appears the subsidy isn’t as great as we may think if so few claim the deduction.

Bernholz mentions that many wealthy people have eschewed tax deduction and formed LLCs to distribute funds to maintain tight control. But there is also increased prevalence of donor advised funds (DAF) which do provide a deduction without any mandate to distribute the funds to charities, and therefore an heightened level of control as well. If you consider that a portion of that 8% claiming deductions may have never reached a charity because it is parked in a DAF that hasn’t distributed, the government is subsidizing non-profits even less than we might imagine.