Nonprofits’ tax-exempt status and their reliance on donations mean that they can, in some cases, be used to commit serious acts of fraud. While such cases are actually pretty rare, there has been a nationwide recommitment on the state level to nonprofit monitoring and investigation, especially in light of a few high-profile fraud cases.
Part of this is because the IRS, which is responsible for determining the tax-exempt status nonprofits, is overworked and understaffed. New duties brought up by the Affordable Care Act gave the agency more work to do, but Congress has given it less budget with which to do that work. As a result, the IRS has had a more difficult time monitoring nonprofits to make sure that they’re on the up and up.
But state regulators such as attorneys general have stepped up their game, realizing that they not only need to pick up the IRS’s slack, but also that keeping an eye on nonprofits is good for their own states.
Across the country, states have not only stepped up their own nonprofit monitoring, but they’re reaching across state lines to work with others. The goal isn’t to increase regulations on nonprofits across the board, but to actually decrease regulatory burdens on those nonprofits that follow the rules.
With states paying closer attention to nonprofits, those organizations will have all the more reason to make sure that they’re filing the correct paperwork when it needs to be filed. Being under greater scrutiny will also make it harder for existing nonprofits to get involved—accidentally or intentionally—with fraud and likely make it harder to start organizations solely to defraud donors. Increased monitoring also means more people to contact if nonprofits have questions about tax issues or the like.
Ultimately, what this means is that nonprofits of any size need to take compliance with state regulations as seriously as compliance with federal regulations. It will also be important to monitor state law developments that could affect them.