Nonprofits across the country are feeling the effects of an increasingly polarized political environment and new state restrictions on their advocacy work, especially if they work on issues such as immigration and environmental justice, experts said last week as they discussed the future of nonprofit regulation.
State regulators said they are facing their own set of challenges as Internal Revenue Service data on 501(c)(3) organizations becomes a less reliable tool for enforcing charity laws.
These subjects were discussed at a gathering of more than 50 nonprofit leaders, regulatory experts, and lawyers hosted by the Urban Institute in partnership with the Lilly Family School of Philanthropy at Indiana University. Dozens more virtually attended the two-day symposium that covered a range of issues such as civil rights and lobbying activities.
“Whether it’s First Amendment guarantees of free speech, association, privacy, or equal protection in our democracy, these battles are often waged by and through nonprofit organizations,” said Elizabeth Boris, a fellow at the Urban Institute’s Center on Nonprofits and Philanthropy.
Meanwhile, navigating First Amendment rights and protecting the public against scams, misinformation, and other fraudulent activities requires “adroit” regulations, she said. And those regulations must be “clear, up-to-date, and efficient.”
Increased Litigation Against Nonprofits
A rise in state-led lawsuits and legal action against nonprofits, especially in conservative states, was a major focus of the event.
“All of us are concerned about shrinking civil society space,” said Beth Gazley, a professor at Indiana University-Bloomington who studies civic engagement, local governance, and nonprofit management.
Gazley said an environment of “authoritarianism” is affecting the advocacy work of nonprofits, summarizing a draft study she wrote and presented alongside Jennifer Alexander, a professor at the University of Texas at San Antonio. The study, “Authoritarianism in U.S. State Politics and Its Impact on Nonprofit Civil Liberties,” details how state governments are constraining nonprofits’ civic activities by threatening to cut their funding, stigmatizing their work, or creating hurdles for operating as a charitable organization if they associate with certain communities or activist groups. For example, lawmakers in Georgia have proposed restricting the use of charitable funds for posting bail.
These changes have often been aimed at specific groups, such as Black Lives Matter and environmental justice advocates, Gazley said.
In Texas, immigrant rights groups are under intense scrutiny as right-leaning lawmakers work to restrict access to resources for undocumented people crossing the U.S.-Mexico border, Alexander said. These efforts extend to Catholic charities, such as the El Paso-based Annunciation House shelter, which the Texas Attorney General’s Office recently accused of smuggling immigrants into the country.
To protect their staff from harassment and negative media attention, some groups have begun adopting protective measures such as encrypting emails, Alexander said.
“They’re in a very defensive posture, and they have to be very careful,” she said.
Panelists also spoke of the surge of proposed anti-DEI laws in the wake of last year’s Supreme Court decision overturning affirmative action in college admissions. A pending lawsuit against the Fearless Fund, a Georgia-based nonprofit that provides funding to Black women entrepreneurs, could make clearer how philanthropy will be affected by affirmative action bans.
None of this is new, according to Alexander Reid, a partner in the law firm of BakerHostetler, who talked about how opposition by policymakers to certain political activities — such as advocating for birth control or racial equity in the 20th century — created a legacy of inconsistent and unclear nonprofit regulation.
“A nonsensical regulatory regime enacted to protect entrenched power — that’s what we’re seeing over and over again,” he said.
Transparency in the Age of Polarization
Symposium participants also addressed political lobbying and proposals to increase oversight of donor-advised funds.
Donor-advised funds offer a way to move charitable money to political groups anonymously, according to a study presented by Helen Flannery of the Institute for Policy Studies and Ohio State University’s Brian Mittendorf. However, it’s unclear how often that happens because donors don’t have to disclose how they spend DAF money.
“We know money is flowing from private foundations into donor-advised funds,” Mittendorf said. “I think the presumption there is that it’s a means to meet payout requirements or something else.”
He said he and Flannery are trying to understand the extent to which DAFs have become “a way for private foundations to support charities without having to disclose what charities they’re supporting.”
The scholars suggested regulations might be needed to prevent donors using DAFs to obscure their giving from the public and regulators.
Others pushed back on that idea. Dan Heist, an assistant professor of public service and ethics at Brigham Young University who also studies DAF giving, said donors should have a right to maintain their anonymity.
“I talked with a donor who gave to her daughter’s school and wanted to be anonymous so that the daughter wouldn’t know and the teachers wouldn’t know that they were benefactors of the school,” he said.
“There are people who give anonymously for religious reasons,” he added.
Given the polarized political climate, some donors might be less likely to support issues such as DEI or abortion rights if their identities were made public, noted Ellen Aprill, a tax law professor at Loyola Marymount University.
IRS Regulatory Hurdles
Regulators also talked about the challenges they face overseeing charitable giving. A major hurdle is enforcing laws at the state level when the federal data used to identify and track the activities of charitable organizations is often unreliable.
The IRS’s Business Master File Extract listing501(c)(3) charitable organizations is consistently out-of-date, noted Janet Kleinfelter, deputy attorney general at Tennessee Attorney General’s Office.
“I’m in charge of registration for the state of Tennessee, and when we’re looking at an entity and we go look at the Master Business File to see if they’re out there saying they’re a 501(c)(3), I can’t rely on the data,” she said.
“I can’t tell you the number of times that I’ve gone there and looked for an organization that I know has been revoked ... that is not a 501(c)(3) because they haven’t filed a 990 in the past, oh, 10 years. But they still show up on the Business Master File as still being good. It doesn’t show that they’ve been revoked,” she said.
Additionally, there are issues when groups are granted charity status and then engage in fraud. Michigan’s Attorney General’s office has had to fight court cases against organizations that secured 501(c)(3) status from the IRS but were not operating as a charitable organization, said Assistant Attorney General Brien Winfield.
“It creates a problem when the IRS approves 501(c)(3) status that should not be approved,” he said.
The IRS’s 1023-EZ form has further complicated matters by making it easier for organizations to apply for charitable status, panelists said. The form is a simple three-page application for groups with budgets of $50,000 or less. The Minnesota Council of Nonprofits is not in favor of the form, Marie Ellis, the group’s public policy director, said, because it provides too little information to the IRS about whether a nonprofit is legitimate.
More effective oversight is critical to protect public interest when nonprofits receive a surge in donations, such as during the pandemic and the 2020 racial reckoning, she said. Pressure is increasing for government officials to clamp down on scams and other fraudulent activities in the wake of high-profile incidents, such as the scheme by the nonprofit Feeding Our Future to steal $250 million in federal funding, she said.
“Sometimes people are surprised to learn that we want regulations,” she said. But more regulation ensures people trust nonprofits, she said. “When there are instances of problems, it looks bad for all of us.”
The Future of Nonprofit Regulation
Multiple regulatory proposals were highlighted at the symposium, including the Accelerating Charitable Efforts Act, which would offer immediate tax breaks to those who disburse money quickly from their donor-advised funds. The proposal was supported by some big names, including billionaire philanthropist John Arnold, when it was unveiled in 2020. However, opponents spent $11 million to block the legislation, a recent report found.
A 2023 effort to compel the IRS to require nonprofits to disclose the race and gender composition of their boards, as part of a push for more diverse leadership, also was highlighted. Lloyd Hitoshi Mayer, a Notre Dame law school professor, was among the people seeking IRS action but said he thought it unlikely the amendment would be adopted anytime soon.
Even so, he said, the organizers are “in it for the long term. This is not a one-off political gesture. This is something that they’re thinking will require many years, decades of effort, but it’s possible.”
Some of the speakers threw out ideas for how the regulatory structure for nonprofits might be improved.
“The bottom line is the oversight structure is broken,” said Marcus Owens, former director of the IRS’s exempt organizations division and an expert on dark money.
There is insufficient oversight of tax-exempt groups that engage in lobbying and campaign finance, he said, noting that some groups omit that information from their 990 forms. In 2013, the National Rifle Association didn’t file a Schedule C, where political lobbying activity is listed, he pointed out.
“They entered a zero. This is the National Rifle Association,” he said with a chuckle.
“They did do some lobbying because their lobbyists — lawyers, by and large — duly reported it to Congress under the Lobbying Disclosure Act,” he said.
Owens proposed eliminating the Federal Election Commission, which enforces campaign finance law. He also proposed eliminating private foundation excise taxes and placing all enforcement into a separate enforcement agency that would be overseen by — but not be part of — the IRS. The head of that agency could be appointed by the IRS commissioner, he explained. And this new agency could act as a state attorney general would with federal enforcement.
“If there was a newspaper story on Sunday that showed a bad act, the agency could contact the tax-exempt organization on Monday and ask them about it,” he said.