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Disclosure, Accuracy and the Form 990

Beth Simone Noveck and Carl Malamud are pushing the IRS to publicly disclose more data on tax-exempt groups, make it more accessible in electronic form, and to do so more promptly. Count me among the effort’s biggest cheerleaders. If this push succeeds, we'll have a better handle on a key sector in U.S. society—although we'll still be in the dark about crucial details of how nonprofits are funded. 

Tax-exempt organizations of all kinds—traditional nonprofits, private foundations, and political advocacy outfits—submit to the IRS, in some mutation, a form 990. These are yearly updates on the organizations' income, assets, expenditures, donations and other relevant details. They’re similar to what public companies file with the SEC. 

In Utopia, 990s fully document the organizations to which government gives tax breaks. And taxpayers get that information free of charge.

In the U.S., while government "has agreed to transparency measures" regarding 990 data, “they're made so inconvenient that no one's likely to use them," according to Tom Lee. The IRS processes these forms, compiles them and sells the output as a box set of DVDs. Organizations like the Foundation Center and Guidestar then buy that information and put it online.

Only at this late step in the process does the data become publicly available. It’s usually at least two years old by then and hardly error free. The information reaches the waiting citizenry as scanned PDF files that are about as easy to sort through as a dumpster. Here’s an example of one. 

Oh, and one other thing: 990s don't force most nonprofits to reveal the identity of their donors or how much money these donors gave. That little loophole has allowed nonprofit groups to become major conduits for anonymous cash looking to influence politics and policy.  

The 990 data is fine as it is “for digging into the finances and services of one nonprofit," as Cynthia Ottinger's written, but not for larger scale analyses. Good luck trying to use 990 data to identify sector-wide trends over time, for example. And should you want to know anything about a tax-exempt organization’s pre-2000 finances, you'll still have to contact them yourself.

Our country’s 1.6 million tax-exempt organizations report to the IRS Tax Exempt & Government Entities Division. Last count, they had a staff of 876 people. They investigated 1.36% of all tax-exempt organization filings in 2011, according to Oonagh Breen.

There is, in other words a 98.64% chance that no one will even check your 990 for bunk information. This is hardly a deterrent against negligence and/or outright fraud. Breen’s concern, and one that I share, is that an increase in

990 disclosure without a simultaneous increase in regulatory oversight create[s] a greater incentive for charities [and other groups] to misinterpret and misreport functional expenses on annual filings. The threat to data quality for all those relying on the form is immediately apparent.

Nonprofit Coordinating Committee of New York President Peter Sword called it "an open secret that many 990s are filed incomplete and inaccurate.” Though dated, this 2004 Urban Institute report counts several ways in which this is true.

The unquestioned and maybe dangerous assumption is that better access to 990 data is the only issue at stake. Without more frequent sector audits, better disclosure policies risk spreading more of the same bad information.